Written by Shane Balkham.
Markets remain focused on the war in Ukraine and, although there were tentative signs of progress and positivity over the peace talks in Turkey, the fighting continues unabated. The Ukrainian Government has refused Russia’s demands that the port of Mariupol be surrendered. Development in talks is welcome, however it seems impossible that Europe can return to how things stood before the invasion. Sanctions against Russia will linger and spending on energy security and defence will likely take on greater importance and significance for many countries.
Before Russia had invaded Ukraine and inflicted a terrible toll on human life, the markets were fully focused on the rotation to an interest rising environment and how quickly rates would be hiked in order to combat the rising levels of inflation. Last week, we had the committee meetings from the central banks of the US and UK to give guidance on how they will enact interest rate policy.
The Federal Reserve raised interest rates by 0.25% and gave a generally buoyant outlook, citing the strong employment numbers in the US. This was arguably expected, and the key element was always going to be the forward guidance for the path of rate rises in 2022. The projections from the Fed showed that six additional rate hikes are now priced in for the remainder of the year, putting year end interest rates at 1.75%.
The Bank of England also raised rates by 0.25%, making it three consecutive meetings of rising interest rates by a quarter percent. However, the accompanying rhetoric was more subdued than its US counterpart, noting the risks to the growth stemming from the war in Ukraine.
The war has undoubtedly made the decision making of the central banks more difficult. The effect on the supply of food and energy has increased the pressures on inflation, where prices have already been rising sharply. This could dent consumer confidence and the policymakers will not want to compound the problem by raising rates too quickly, a sentiment that was echoed in the Bank of England’s minutes.
The backdrop continues to be challenging and uncertain and will be for some time. The markets will remain focused on the central banks, even beyond the hopeful cessation of the conflict. Having appropriately diversified investments during times of stress continues to be a successful strategy.