This week we take a look at the recent interest rate hikes in both the US and UK. Read on to see what this means for markets...
US Federal Reserve increased interest rates by 0.75% in response to resilient data
The Fed raised interest rates by 0.75% last week to 4.0% as economic data showed that the economy and job market were proving surprisingly resilient to previous rate hikes. Chairman Powell confirmed this as he commented that “We (the Fed) still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected”.
These comments poured cold water on hopes that the Fed was beginning to consider slowing the pace of rate hikes and potentially pausing rate hiking sometime next year. As a result, US bonds and US equities sold off in tandem.
Bank of England raises interest rates by 0.75% but signals less hikes from here
By a 7-2 majority the Bank of England’s Monetary Policy Committee delivered a “dovish” rate hike of 75bp, from 2.25% to 3.00% (hard though it may be to conceive of the largest one-off hike in the Bank Rate since Black Wednesday in 1992 as “dovish”).
The dovishness resided in the fact that in the press conference Governor Bailey pushed back against the extent of future rate hikes priced by the market. Prior to the meeting, the market saw the Bank Rate peaking at 4.75% in the second half of next year, and actually still does despite the governor’s pushback. Moreover, the press release stated that: "Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets". This is far less forceful language than appeared in the statement accompanying the previous MPC meeting.
This serves to underline the extreme reluctance of the BoE to hike any more than the bare minimum required to placate the market, owing to the high degree of sensitivity of the UK economy to interest rates (above all via mortgages/housing market). We suspect that persistent inflation may force its hand next year, exacerbating the already severe and protracted UK recession it currently forecasts.
The Chinese equity market was the best performing major market last week as rumours swirled that officials had started considering how the country would step away from the Dynamic Zero-Covid policy. Chinese equities gained over 10% during the week. Elsewhere, US equities were down in response to hawkish rhetoric from the Federal Reserve.
Bond markets were generally down over the week while commodities were broadly flat.
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