Overnight we saw the Bank of England and the ECB lift the target rate by 50 basis points.
The UK story appears to be one where inflation is easing a little though growth prospects remain weak into the medium term. In the ECB, inflation is perhaps more troublesome, and further rate rises are anticipated. But both are seen by the market to be the peak of this raising cycle (though with risks to the upside).
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Well clearly most central banks got the 50-basis point hike memo, as following the Fed yesterday, with the Bank of England, the ECB and The Swiss Central Bank all hikes their rates by 0.5%. Markets reacted with significant falls, as the higher for longer mantra is threatening future earning, while Treasury yields fell across the curve. This all does put the RBA out of line given its recent 25-basis point rises and suggests we in Australia are behind the ball – significantly. Hey, but then of course Australia is different – right?
U.S. stock indexes finished sharply lower on Thursday with the Dow Jones Industrial Average logging its biggest daily decline in over three months, as investors continued to digest tough talk from the Federal Reserve on inflation that revived concerns about a potential U.S. recession.
In the UK, Bank of England Governor Andrew Bailey said he saw “good news” in UK inflation figures that ticked down from a 41-year high, but there was a concern that consumer prices could leap again and that the central bank has more to do to prevent a wage-price spiral. Speaking after policy makers lifted their key rate a half point to 3.5%, the highest since 2014, Bailey said the risk is that inflation sticks around longer that the BOE is anticipating.
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The UK inflation data come in hot today, signalling broad-based inflation, including across services. Gas, electricity costs and food costs were among the main drivers, offset small falls in petrol and used cars.
This suggests the Bank of England will need to hike rates some more – though that may depend on the Chancellors Budget tomorrow.
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The Bank of England raised interest rates by the most since 1989 on Thursday but warned investors that the risk of Britain’s longest recession in at least a century means borrowing costs are likely to rise less than they expect.
The BoE increased Bank Rate to 3% from 2.25% and warned that the British economy might not grow for another two years – the longest slump in records dating back to the 1920s – if rates were to go up by as much as markets have recently bet. The pound tumbled after the decision, while London-listed stocks fell and UK bonds came under pressure.
“We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets,” Governor Andrew Bailey said, in an unusually blunt message.
The BoE said it now expects inflation will hit a 40-year high of around 11% during the current quarter, more than five times its 2% target. But it also thinks the economy has entered a recession that could mean it contracts in both 2023 and 2024 and shrinks by 2.9% in total.
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Digital Finance Analytics (DFA) Blog
The Central Bank Rate Rise Pass The Parcel Continues... [Podcast]
The Bank of England raised interest rates by the most since 1989 on Thursday but warned investors that the risk of Britain’s longest recession in at least a century means borrowing costs are likely to rise less than they expect.
The BoE increased Bank Rate to 3% from 2.25% and warned that the British economy might not grow for another two years – the longest slump in records dating back to the 1920s – if rates were to go up by as much as markets have recently bet. The pound tumbled after the decision, while London-listed stocks fell and UK bonds came under pressure.
“We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets,” Governor Andrew Bailey said, in an unusually blunt message.
The BoE said it now expects inflation will hit a 40-year high of around 11% during the current quarter, more than five times its 2% target. But it also thinks the economy has entered a recession that could mean it contracts in both 2023 and 2024 and shrinks by 2.9% in total.
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Last Friday the new British Chancellor Quasi Kwarteng unveiled £45 billion of annual unfunded tax cuts that sparked fears the national debt will spiral out of control. The measures included tax cuts, unfettered bankers’ bonuses and other incentives to drive growth.
Deregulatory packages for the financial-services sector, planning, agriculture, telecoms and childcare are only due after the party conference recess and before the Office for Budget Responsibility publishes its independent assessment of the public finances on Nov. 23. The government has said it will wait until the OBR forecast to publish its fiscal framework, which will be a combination of fiscal and growth measures. So all we got was a high-level pen picture, with no detail, and no forecasts. Which is why they did not call it a budget.
But not only was this a major shift from previous Government policy, but it triggered concerns it may be inflationary. Markets reacted badly, as we reported in our weekly wrap, and continued to drive bond yields higher (remember the inverse relationship between bond yields and bond prices – see my earlier show on bonds if you want to understand how these IOU’s work and are priced. https://youtu.be/aOZZPtxlMSQ
Long term bond yields rose significantly, as can be seen by the plot of UK 30-year bonds. And significantly, these instruments are used to price mortgages and cover exposures for pension funds, so they drive the momentum in the financial markets. So, no surprise on Tuesday, markets were roiled and continued their bear market slides, not just in the UK but around the world. The fallout was significant with people thinking the Bank of England would have to lift interest rates – perhaps up to 6% – and meantime many lenders stopped writing mortgages, while pension funds and hedge funds were forced to sell bonds as the prices fell, causing a self-reinforcing downward spiral.
Also, on Tuesday BOE Chief Economist Huw Pill said the bank’s program of government bond sales should go ahead as planned next week if the market repricing stays orderly.
Then On Wednesday we had a series of events which shocked the markets. First the IMF openly criticised the UK government over its plan for tax cuts, warning that the measures are likely to fuel the cost-of-living crisis. In an unusually outspoken statement, the IMF said the proposal was likely to increase inequality and add to pressures pushing up prices.
The IMF of course is normally dealing with developing countries, and applying a Neo-liberal philosophy seeks to cut spending, reduce debt and bring struggling economies back to health. Often financial help is predicated on them taking specific, and often unpopular measures. So, when the IMF specifically called out the UK for its policies, the writing was on the wall.
Not much later, the Bank of England announced they would be carrying out unlimited temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. They are seeking to stave off the crash, by unlimited purchases of gilts.
Is this a Lehman moment?
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If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing alongside you.
Buying property, is both challenging and adversarial. The vendor has a professional on their side.
Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make.
Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
More than 90 Central Banks have now lifted rates, more than half by at least 75 basis points in one go this year. Last night the UK lifted by 0.5% and we look at their outlook, as more channel Paul Volcker who is widely acknowledged as the premier inflation fighter in Federal Reserve history.
When President Carter nominated him to be Fed Chair in July 1979, Volcker knew he faced a daunting task. Inflation was 11 percent, inflicting pain on financial markets and economic performance, and the second oil shock was unfolding. The Fed’s lack of inflation-fighting credibility had generated severe currency devaluation and a U.S. dollar crisis in late 1978.
At his confirmation hearings before the Senate Banking Committee, Volcker made his views clear. The Fed would have to clamp down on monetary policy to reverse the damaging upward price-wage cycle and wring out inflationary expectations. To his credit, Carter supported Volcker, even though he knew it may cause a recession, as did President Reagan.
Volcker took heat when the Fed sent rates soaring and the economy incurred back-to-back recessions.
Go to the Walk The World Universe at https://walktheworld.com.au/
More than 90 Central Banks have now lifted rates, more than half by at least 75 basis points in one go this year. Last night the UK lifted by 0.5% and we look at their outlook, as more channel Paul Volcker who is widely acknowledged as the premier inflation fighter in Federal Reserve history.
When President Carter nominated him to be Fed Chair in July 1979, Volcker knew he faced a daunting task. Inflation was 11 percent, inflicting pain on financial markets and economic performance, and the second oil shock was unfolding. The Fed’s lack of inflation-fighting credibility had generated severe currency devaluation and a U.S. dollar crisis in late 1978.
At his confirmation hearings before the Senate Banking Committee, Volcker made his views clear. The Fed would have to clamp down on monetary policy to reverse the damaging upward price-wage cycle and wring out inflationary expectations. To his credit, Carter supported Volcker, even though he knew it may cause a recession, as did President Reagan.
Volcker took heat when the Fed sent rates soaring and the economy incurred back-to-back recessions.
Go to the Walk The World Universe at https://walktheworld.com.au/
The news from the UK was horrid overnight. Inflation getting embedded and hitting those lease able to cope. The Bank of England’s 13% for peak inflation is probably understated.
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The Bank of England is the latest central bank to raise interest rates by at least 50 basis points in one go this year as it unleashed its biggest interest-rate hike in 27 years and warned the UK is heading for more than a year of recession under the weight of soaring inflation.
The half-point increase to 1.75% was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed, potentially putting similar hikes on the table for coming meetings.
They sheeted much of the inflation to ultra-high energy costs, following on from gas prices which have been driven higher by the Ukraine situation. Inflationary pressures have “intensified significantly,” the BOE said. “The latest rise in gas prices has led to another significant deterioration in the outlook for activity.”
The BOE lifted its forecast for the peak of inflation to 13.3% in October amid that surge in gas prices, and warned that price gains will remain elevated throughout 2023. That will sharpen a cost-of-living crisis that will see real disposable incomes fall more than at any time in around 60 years. Even after billions of pounds of government support for struggling households, families are set to be around 5% worse off by the end of 2023 with incomes falling both this year and next.
Go to the Walk The World Universe at https://walktheworld.com.au/
Today’s post is brought to you by Ribbon Property Consultants. If you are buying your home in Sydney’s contentious market, you do not need to stand alone. This is the time you need to have Edwin from Ribbon Property Consultants standing along side you. Buying property, is both challenging and adversarial. The vendor has a professional on their side. Emotions run high – price discovery and price transparency are hard to find – then there is the wasted time and financial investment you make. Edwin understands your needs. So why not engage a licensed professional to stand alongside you. With RPC you know you have: experience, knowledge, and master negotiators, looking after your best interest.
Shoot Ribbon an email on info@ribbonproperty.com.au & use promo code: DFA-WTW/MARTIN to receive your 10% DISCOUNT OFFER.
