Written by Chris Ayton.
As expected, the Bank of England (BoE) hiked interest rates by 0.25% to 4.5% last week, in the process warning that inflation will not fall as fast as expected over the next 12 months. This was a record twelfth rate rise in a row. The BoE also noted that it appreciated that only around a third of the impact from the previous rises had been felt by the UK economy, with 1.4 million people due to come off fixed rate mortgages this year, nearly 60% of which were fixed at interest rates below 2%. While this may bring hope to some that this was signalling a pause in further increases, the BoE warned that it continued to monitor indicators of persistent inflationary pressures and commented “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
More positively, the Bank significantly upgraded its forecast for UK GDP Growth, expecting 0.25% growth this year followed by 0.75% in 2024 and 2025. This was the largest upwards revision to growth expectations on record and contrasts sharply with predictions late last year that the UK was heading for the longest recession in 50 years. This was followed by confirmation from the Office of National Statistics on Friday that the UK economy had grown 0.1% in the first quarter, the same as observed in the previous quarter.
News in the US was dominated by internal fighting over the extension of the debt ceiling. Having reached the maximum it is legally allowed to borrow, the U.S. government require an extension to that limit in very short order to be able to pay its upcoming debt obligations, to avoid a destabilising default, and prevent the financial chaos that would undoubtedly ensue. Previously, these challenges have been resolved at the twenty third hour but, in the meantime, this is likely to impact market sentiment.
Less well reported was the positive news that the top U.S. national security adviser, Jake Sullivan, met with China’s top diplomat, Wang Yi, in Vienna in an attempt to calm relations between the two superpowers. Talks were said to be ’substantive and constructive’. The souring of relations, exacerbated by the Chinese spy balloon drama in February, has undoubtedly been a drag on China’s equity market performance in 2023.