22 March 2023: Market expects BoE to hike again


  • Public Sector borrowing at record high in February
  • Yellen sees contagion in current Turmoil
  • ZEW survey slumps in Germany and wider Eurozone
GBP – Market Commentary

Stamp duty receipts down 27% in a year ago

One of the most telling statistics from the housing market and the effect of fifteen months of rate hikes has been the fall in stamp duty receipts. There has been a 27% fall compared with the same month a year ago.

The fall from £1.3 billion in February 2022 to £900 million last month is a product of the severe squeeze that has been placed on household budgets by rising inflation. With real wages continuing to fall there is little prospect of any revival in activity before the end of the year.

Following the mayhem caused by the mini budget during Liz Truss’ premiership when home loan rates blew out causing a number of lenders to withdraw mortgage products, the market has calmed down somewhat although it has not yet returned to pre-Truss levels yet.

With short term interest rates already at a fourteen year high, borrowers are anxiously awaiting the result of tomorrow’s MPC meeting. It is likely that another twenty-five basis points will be added to the base rate bringing it to 4.25%.

Given Andrew Bailey’s penchant for being almost apologetic for the continuation of the tightening of monetary policy, it is hard to predict when the Bank will call a halt.

Catherine Mann, the only independent member of the MPC who has voted for even greater implements of increases than have been eventually agreed, believes that the lag in the effect of rate hikes means that they are not yet having their desired effect upon demand.

Since the level at which interest rates become neutral and then restrictive on demand is subjective, depending on what measure one uses, it will be impossible to gauge when they will even reach a point of neutrality until two, or possibly three months after it has happened.

It is expected that the vote for a rate hike will change from 7-2 in favour to 6-3 tomorrow with Jonathan Haskell, who is independent, but until now closely aligned with the Bank’s representatives voting for no change.

Bailey is likely to acknowledge the current turmoil in the financial markets. He may hint at the Bank being close to ending its long run of rate increases, although he will confirm that the Committee remains data dependent.

Sterling has fared reasonably well over the period of uncertainty brought about by the collapse of Silicon Valley Bank. Indeed, it has been supportive of HSBCs purchase of the bank’s London operation.

Yesterday, the pound retraced the gains it made on Monday, falling to a low of 1.2187 versus the dollar, but recovered somewhat to close at 1.2217.

USD – Market Commentary

Is the FOMC going to aim for a dovish hike?

The smart money is on another rate hike being agreed at the FOMC meeting that concludes later today.

Following two very strong employment reports seen in January and February and inflation too slowly for Jerome Powells liking a hike of fifty basis points could have been expected, particularly with the committee being wrong footed at its last meeting but given the possibility of further fallout from the collapse of Silicon Valley Bank it will be considered prudent to hike by just twenty five points.

Treasury Secretary, Janet Yellen provided a degree of support for smaller, regional banks yesterday by vowing to protect them from contraction. These institutions who cater for the vast majority of working people’s accounts have seen billions of dollars withdrawn creating runs on several. As a result, they have struggled for liquidity.

The Federal Deposit Insurance Corporation guarantees deposits with a limit of $250k but Yellen has bolstered that with no limit guarantee on deposits with the two banks that have failed so far. In her strongest commitment yet she implicitly confirmed that her actions would be extended to any other regional bank that got into difficulties.

The collapse of Signature Bank and the larger Silicon Valley Bank has led to the Administration guaranteeing a further $150 billion of deposits that otherwise would have been in jeopardy.

Yellen described the ongoing turmoil as a crisis of solvency rather than a similar situation to 2008 where the issue was down to corporate failure.

It is understood that Congress has been considering raising the limit of $250k since many in the House consider it to be far too low when compared to the increase in the size of bank’s balance sheets.

Another financial institution, First Republic needed additional support earlier in the week, after its share price fell by 45%. It is understood that $70 billion in deposits have been withdrawn over the past week.

The dollar continues to suffer while the potential hike in interest rates to be confirmed later has been largely ignored.

Yesterday, the Greenback fell to a low of 102.99, closing at 103.26.

EUR – Market Commentary

Lagarde sees turmoil affecting the next rate decision

Christine Lagarde has tempered her more hawkish tendencies, no doubt chastened by the criticism she received by pre-empting the vote in the Governing Council of the Central Bank confirming the rate hike.

Yesterday the President of the ECB spoke of her concerns about the spread of the turmoil affecting the Banks intention to continue to tighten monetary policy well into the second quarter of the year.

With inflation remaining stubbornly high the Bank may be thwarted should there be any further fallout from the collapse of Credit Suisse and its takeover by Union Bank of Switzerland.

She went on to say that the Central bank stands ready to intervene if contagion spreads. While she didn’t provide any further detail it is understood that the Bank is ready to pump a virtually unlimited amount of liquidity into the market to ensure that banks are able to fulfill their obligations.

She said that the work that has been done since 2008 has ensured that the market as a whole has strong liquidity and capital positions.

Having been critical of the Swiss National Bank over their actions in forcing Credit Suisse bondholders to take losses on their positions, yesterday,she praised the swift actions of the Swiss authorities which had averted far more serious repercussions.

Despite the actions of the Swiss authorities, shares in several European banks continue to suffer. Deutsche Bank and BNP Paribas where two of the major sufferers along with Barclays and HSBC from the UK.

Industrial unrest continues to grow in France following the Government’s decision to push through a bill in Parliament raising the retirement age from 62 to 64.

Nationwide strikes are continuing to bring turmoil to industry and commerce.

The Euro remains in the front foot versus a weakening dollar although until the current market turmoil comes to an end, there will be a sense of fear in the market.

Yesterday the Euro rose to a high of 1.0788, closing close to its high at 1.0767. The proximity of the FOMC meeting appears to be doing little to dampen traders enthusiasm, and if there is any sign of dovishness from Jerome Powell later, there may be a test of resistance at 1.0790 seen.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
21 Mar - 22 Mar 2023

Click on a currency pair to set up a rate alert

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.