By Lauren Buckner
Yesterday saw the Bank of England raise interest rates by a further 0.5% In the UK, a seventh consecutive increase in rates. Interest rates now sit at their highest level since 2008 (a 14 year high) and are predicted to continue to rise as the Bank attempt to tackle spiralling inflation levels.
Inflation is currently sitting at a 9.9%, five times higher than the Bank of England’s 2% target rate. Ahead of an increase in fuel prices on 1st October as the energy cap increases it is possible that there is still worse to come and therefore Sterling initially lost some value as the market was disappointed that the BofE had not been bolder and introduced a rise of three quarters of a per cent (0.75%). The outlook for future interest rises in the UK is also less clear from yesterday as the 9 members were split with a 5/4 vote in favour of the 0.5% increase,and further divergence with three in favour of a 0.75% rise and one for only 0.25%. As the Monetary Policy Committee (MPC) begin to differ in their opinions uncertainty over future direction with interest rates begins to damage investor appetite in that country, and can cause a currency sell off (negative for that country’s currency) and may have factored in to the initial GBP loss. The Bank of England also made clear that they believe the UK has now entered recession, a full quarter earlier than initially predicted with UK GDP predicted to have shrunk 0.1% between July and September.
The MPC however, iterated that this was something of an interim move as government support against the current cost of living crisis can not be fully factored in at this stage. As the government announce a reversal of recent rises to National Insurance our new Chanceller of the Exchequer Kwasi Kwarteng prepares to deliver a mini-budget later today with a focus on kickstarting economic growth. This has given the Pound a small step up against the Euro, but continues to compound it’s woes versus the USD as economic uncertainty for the Winter remains in focus. Expected around 9.30 this morning, the Chancellors mini-budget could be a bit of a curveball. It is believed that Mr Kwarteng will look at a reduction in Stamp Duty to stimulate a stagnating housing market, introduce low-tax zones and a reduction in corporation tax and remove a current cap in Bankers’ bonuses to stimulate the financial services sector in to greater productivity – clearly some policies will be more popular than others for UK voters but for investors this is hoped to produce a wave of confidence in the UK economy.
The bigger picture globally this week has seen tensions escalate between Russia and the rest of the world. As Vladmir Putin announced a call up of a further 300,000 troops in its assault on Ukraine and four ‘snap votes’ in Russian part-occupied territories in Ukraine. As World leaders reacted to further advances by Russia and declared these votes a sham exercise Putin increased tensions by warning that his country would use ‘all means necessary’ to protect its territory, seen as a threat of nuclear assault. As the UN Security council discuss the invasion and their intended approach to stop the conflict, Russia’s foreign secretary, Sergei Lavrov yesterday stormed out of the council meeting further heightening concerns over Russian intentions.
As the global storm continues to escalate the USD has strengthened to fresh 20 year highs against the euro and almost 40 year highs versus the Pound as traders rush to the greenback as a safe-haven currency. Even as Federal Reserve chairman Jay Powell refused to rule out an upcoming recession in the worlds largest economy (the US) following a third increase of 0.75pc to interest rates on Wednesday evening bringing the target interest rate to a range of 3-3.25% appetite for the Dollar is not diminishing . Fed officials currently predict interest rates will hit 4.4% in the US by year end. Market analysts are beginning to raise concerns that the global sweep of rate hikes which increases borrowing costs for both businesses and consumers could in turn contribute to greater economic slowdown. As Autumn officially arrives in the UK and global uncertainty continues our clients should be reminded about their dream ‘Place in the Sun’ and warmer climes, please do keep in touch for any upcoming transfers required.