WeekWatch -‘The three main Western Central banks all raised interest rates by 0.5% within 24 hours of each other’ December 22
While global attention was largely focused on the build-up to the World Cup final between Argentina and France last week, the three main Western Central banks all raised interest rates by 0.5% within 24 hours of each other.
That said, the messaging that accompanied the moves varied quite notably.
On the more optimistic side was Bank of England (BoE) Governor Andrew Bailey. He said: “We think we’ve seen possibly this week the first glimmer, with the figures released this week, that it’s not only beginning to come down but it is a little bit below where we thought it would be and that is obviously very good news.”
Bailey was speaking after UK inflation fell from its multi decade high to 10.7%. After a year of inflation dominating much of the economic conversation, any signs that it may at last be on the way down will be welcomed. That said, it remains far above the BoE’s 2% target, and even Bailey admitted there is a risk it may not fall as he hoped, thanks to a tight labour market.
These risks were a factor in the BoE’s decision to raise interest rates to 3.5% on Thursday.
Mark Dowding, Chief Investment Officer at Bluebay, said that the BoE has historically been relatively soft in its messaging. He noted the bank is “acutely aware of the mortgage rate pass through on households already reeling from higher energy costs.” Adding that, “Our 2023 outlook continues to foresee the BoE under delivering versus market expectations, struggling to raise rates above 4%.” This softer stance, Dowding suggests, could help prolong the inflationary issues facing the UK.
The European Central Bank also raised its interest rates by 0.5% last week, however the messaging that accompanied the move was less optimistic about the future. Speaking after the announcement, ECB President Christine Lagarde said that based on a substantial upward revision to the inflation outlook, she expects interest rates will still rise significantly.
Azad Zangana, Senior European Economist and Strategist at Schroders, noted: “Money markets had priced the peak in the main ECB interest rate to reach between 2.75% and 3% early next year. However, the signal from the ECB seems to suggest that the terminal rate [highest point] may now need to be higher given the worsening outlook for inflation.”
Somewhere between these positions was the US. Here, the Federal Reserve again raised interest rates by 0.5%. Inflation in the US has been on a gradual downward curve since June, however Fed chairman Jerome Powell noted ‘we still have some ways to go’ when it comes to getting inflation to a more manageable 2%.
“I wouldn’t see us considering rate cuts until the Committee is confident that inflation is moving down to 2% in a sustained way,” he added, dashing hopes that interest rates would start being cut in the near future.
This messaging was enough to send markets into a retreat, with the NASDAQ and S&P 500 both falling by over 2%.
Wesley Johnston, Senior Portfolio Manager and Research Analyst at Sands Capital, said: “When we talk to companies, we hear that they feel much better about their labour situation today than they have at any point in the past 18 months. The supply chain has also improved a lot.”
He adds that a lot of the inflationary pain has already been factored into many company valuations. After a tough 2022 ends and 2023 begins, investors will be hoping this helps lead to a brighter new year.
Bluebay, Sands Capital and Schroders fund managers for St. James’s Place.
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