Written by Millan Chauhan.
Last week, we saw central banks implement another interest rate increase as they attempt to slow down inflation. In theory, the effective implementation of a higher interest rate depends on how swiftly savers and spenders change their consumption behaviour. Savers will now be financially compensated and spenders may reduce their consumption levels, especially at company level where borrowing becomes more expensive with higher interest rates. Reduced consumption and demand for goods and services will therefore begin to slow down inflation, but there is a time lag associated while consumer and producer behaviours adjust to the new information.
The Federal Reserve implemented a 0.75% rise, 0.25% above expectations. In the US, the likelihood of a 0.75% raise was priced in at 2% until last Monday when the Wall Street Journal reported that officials from the Federal Reserve were weighing up the possibility of a 0.75% rate rise. Higher mortgage rates are often a very direct consequence of rising interest rates and last week US mortgage rates surged to their highest levels in 35 years with the 30-year fixed rate jumping to 5.78%. In the UK, the Bank of England raised rates by 0.25%. As expected, we have begun to see banks and building societies raise their main fixed-rate mortgages as the market expect further rate rises beyond the current interest rates of 1.25%. The Bank of England also announced that it expects inflation to increase further beyond its current level towards 11%.
Global equity markets sold off last week, following the news of the Federal Reserve’s more aggressive stance on interest rate hikes, with MSCI ACWI returning -4.5% in GBP terms. Some sections of the global investment universe remain more sensitive to interest rates and it is most critical to hold a diversified portfolio as the macroeconomic landscape continues to change.