14 March 2023: High rates may lead to loan arrears!


  • SMEs remain cautious despite overall sense of optimism
  • Market falls despite Biden’s reassurance
  • Inflation is falling, but output is stagnating
GBP – Market Commentary

Markets pricing in further interest rates

In another blow to the already fragile UK housing market, concerns are growing that borrowers will be unable to afford their mortgage repayments if interest rates continue to rise.

Although there isn’t a great deal of evidence that households have overleveraged in the manner seen a few years ago when lenders were happy to advance 110% of the value of the security offered, confident that property values would soon catch up, mortgage payments are set to continue to rise with lenders unwilling to allow borrowers to lock-in a fixed rate given the volatility of the market.

The Bank of England is widely expected to raise interest rates again at the March meeting, which will take place next week. While the three independent members of the MPC have been vociferous in expressing their voting intentions, it is unclear if the Bank of England officials who make up the bulk of the committee will vote for a twenty-five or fifty basis point hike.

The British Chambers of Commerce published a review of the UK economy yesterday, in which it reported that its members believe that there is a possibility that over the first two quarters of 2023 there will be a technical recession with GDP contracting moderately, but seeing growth returning in the second half of the year.

This is not a widely held view given the data that has been delivered since the turn of the year.

Exports, which have been affected by Brexit, should improve given the recent improvement in the UK’s relations with mainland Europe. It is in both sides interests to reinvigorate trade since there is a mutual reliance built over many years of cooperation.

The failure of the Silicon Valley Bank is still causing ripples through the country’s tech startup and financial services sectors. HSBC acted by buying up the UK operations of the failed bank yesterday, which added a degree of confidence to the market.

The Chancellor is confident that any fallout can be fairly easily contained, and believes that this is very much a U.S. issue.

Yesterday, Sterling rallied strongly, reaching a high of 1.2199 and closing at 1.2182. It is likely that traders and investors will begin to position themselves today in anticipation of the Budget that Jeremy Hunt will deliver to Parliament tomorrow. Today will see the publication of employment data for February. The unemployment rate will remain close to historic lows, although it is expected to tick up from 3.7% to 3.8%.

USD – Market Commentary

Inflation data due for release later

Although the Treasury is running point over the fallout from the collapse of the Silicon Valley Bank, the FOMC will have to take note of how much of a role rising interest rates had in the bank’s collapse.

Silicon Valley Bank was the fifteenth largest bank in the United States, and questions are being asked if there was a failure of bank supervision, which comes under the purview of the Central Bank.

It seems that cash rich tech companies saw a huge inflow of funds during and immediately following the Pandemic, which found their way to SVB.

SVB acted reasonably prudently by investing in mortgage-backed securities but found their holding losing value as interest rates began to rise. Since bond prices fall when interest rates rise, they are faced with the prospect of holding the bonds until maturity or take a loss.

The situation was exacerbated by tech companies making significant withdrawals to fund further operations in order to invest in other startups.

This draining of liquidity meant that SVB had no option but to liquidate their holdings, and the losses incurred meant that they could no longer satisfy their customer’s demands. This caused a run on the bank, which led to it closing its doors last Friday. The Fed then had forty-eight hours to re-establish the market’s confidence, while the Federal Deposit Insurance Corporation arranged to ensure that deposits remained under their guarantee.

It is likely that how this happened will exercise the thoughts and minds of the FOMC which meets next week but is unlikely to divert them from a further rate hike, although it may see some members moderate their hawkish view and opt for twenty-five points rather than the fifty points that is suggested by the strength of the February employment report, which has been somewhat overshadowed by the renewed fragility of the financial system.

The Government’s decision to guarantee all deposits despite a limit of $250k has provided a degree of confidence that has calmed fears.

The dollar index will remain under pressure until confidence is fully restored. Signature Bank, which is domiciled in New York, came under the Central bank’s control on Sunday.

The index fell to a low of 103.48 yesterday and closed at 103.61. Support is likely at around the 103.25 level and the current weakness will be short-lived unless there is still a domino effect created by the bank failures.

EUR – Market Commentary

Is support solid, or merely technical?

The Eurozone economy is being talked up by Central Bankers and ECB officials, and while it is clear that there are some success stories from the region’s emergence from the Pandemic. Most notably Ireland and Greece, which have performed remarkably and would probably have defaulted had they not received strong support from Brussels and Frankfurt at the of the financial crisis.

While the reduction in these two nation’s reliance on borrowing to fund social programmes and bolster their economies is admirable, there is a great deal of independence exerted by Eurozone members over their economies, where more joint initiatives would likely be more successful for the group as a whole.

The Eurogroup, which met yesterday under the Presidency of Irish Minister of Public Expenditure and National Development Plan Delivery and Reform, Paschal Donohoe is looking at ways in which support for nations who find themselves in difficulty can be provided in a less centralized manner.

In this way. pressure on the Central Bank can be lessened, leaving it more able to deal with creating monetary policy that benefits the region as a whole.

The ECB’s Governing Council begins its rate setting meeting tomorrow. This will conclude on Thursday with the announcement of the latest hike in interest rates. That hike is fairly certain to be fifty basis points, since anything less would require a significant climb down by ECB President, Christine Lagarde.

The inflation data that has been released for February just about justifies a fifty point hike, although a handful of nations still feel that they need more support in staving off stagnation in their economies, than fighting inflation that they still see as transitory.

The high degree of concern regarding a recession is acceptable, but the Central Bank’s policies need to promote growth as well, which isn’t currently happening.

The Euro needs to be supported by monetary policy if it isn’t to resume its long-expected journey towards parity with the dollar. At some point, Central Bank actions will give way to economic activity as a spur for currency strength and as things stand traders favour the dollar since the Fed is seemingly prepared to be more proactive than the ECB.

The single currency rose to a high of 1.0748 yesterday and closed at 1.0731 as the market expressed mild concerns about the strength of the U.S. financial system.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.