Your weekly economic update from the team at FXD Capital
The Bank of England raised interest rates to 0.75% on Thursday, a move most expected and the only surprise arising was the measly 0.25% shift. Eight of the nine Monetary Policy Committee members voted in favour of the change. The sole vote against came from Sir Jon Cunliffe, who argued that the Ukrainian war would dampen economic activity and cause inflation to subside from a demand-led perspective.
The Bank’s rate decision has now become a monthly popcorn event, with each meeting in 2022 bringing an increase. The MPC acknowledged the effect of the Ukraine war on the British economy, noting that it would “accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes”. Unfortunately, with inflation potentially hitting the 8% mark over the summer, the MPC stated the obvious here.
The delta between new inflation forecasts and pre-invasion stands at 1%, and murmurs now surround whether figures reach double digits before invariably quelling.
With three months of rate activity under its belt, the BOE looks rather energetic in comparison to the Federal Reserve, which finally raised rates for the first time since 2018 on Wednesday. The target rate now stands at 0.50% and is expected to be the first of many changes unfurling over 2022. Jay Powell, Fed chair, noted the necessity of the increase in the backdrop of an extremely tight labour market and high inflation. James Bullard of the St Louis Fed was the sole dissenter to the 0.25%, with nominative determinism directing him towards a more “bullish” 0.5% hike.
Fed rate projections have been on an upward shift over the past year, with 2023’s forecasted range of between 2.00 – 3.75% as the prevailing target rate representing an almost +2.00% shift compared to last year.
Stock markets do what stock markets do and responded inversely to the textbook response of a rate rise by rallying strongly. While markets have been pricing in increases for some time now, seeing action follow words was a positive signal for equities that inflation would not be left unchecked. The Nasdaq naturally had the most considerable bump, at 3.8%, its most significant one day rise since November 2020 – it’s had a tough time since then.
Russia avoided a technical default by sending $117m to Citigroup for due coupon payments on its foreign debt. Whether Citi accepts the money remains unknown for now, they have been left in an unenviable position of being the arbitrator for something not so set in stone. The intent of Russia to meet its commitments is interesting in the face of the sanctions it’s facing. In the past, other pariah states like Venezuela have also moved heaven and earth to meet bond commitments in the face of financial struggles, highlighting the absolute necessity of having unblemished reputations within capital markets. Russia may already have one eye on its rebuilding process in the future. Without foreign bonds, you only really have the IMF, private lending, expropriations or bartering commodities as alternative options. Many see China as the true kingpin in the crowd of external observers to the Ukrainian war; it is the only country with the largesse to support an exiled Russian economy. With Russia being all too aware of this, keeping bond investors honest is a necessary move.
After hitting recent highs following Russian sanctions, oil recorded a sharp reversal, with Brent crude falling below $100 a barrel again after a 6.5% fall on Tuesday. The reasoning demonstrated the delicate interconnected nature of the world economy in action: A slowdown in Chinese petroleum demand. Despite Covid-19 seeming like a distant afterthought in the west, lockdowns are still prevalent in the far east. Moreover, with infections rising in China, some of its leading manufacturing hubs are experiencing lockdowns, further increasing concerns about muted demand. Shanghai may potentially be next for the country steadfastly committed to a Covid Zero policy.
All the best for the week ahead
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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