- UK economy 4% lower due to Brexit
- Fed projections point to one more hike
- Lagarde sees inflation declining steeply this year
Bank of England Quarterly Bulletin published tomorrow
Rates are therefore unlikely to reach the 5% level which was predicted by market commentators three months ago. With the base rate of interest currently at 4.25%, it is now likely that the Bank will stop at either 4.25% or 4.75%.
It is now considered unlikely that, unless the current turmoil in the financial markets continues or sees further banks face severe liquidity problems, that rates will remain unchanged for the rest of the year,
Catherine Mann, far and away the most hawkish of the four independent members of the Monetary Policy Committee, spoke over the weekend of her view that inflation will recede over the summer and that is why she voted for a smaller hike than she has done over the past few meetings.
She feels that the effect of the recent rate hike is now being seen in the inflation data, and that provided some motivation for her to vote for the twenty-five point hike that was eventually agreed.
One also based her judgment on the fact that the trend for retail sales is now fairly strong and that is, for her, a strong indicator of underlying robustness.
Two of the remaining three independent members, Silvana Tenreyro and Swati Dhingra, both voted for rates to remain unchanged.
This week, the Bank of England will publish its quarterly bulletin. This is expected to provide further detail on the Central Bank’s view of inflation.
Governor Andrew Bailey stopped short in his press conference last week of confirming that inflation has peaked, but the bulletin is likely to confirm that the headline is expected to fall below 10% and continue to decline into the summer.
The dovish hike agreed by the MPC last week is unlikely to provide any further support to the pound. Last week, it saw a moderate rise within its current range. It climbed to a high of 1.2204 and closed at 1.2174.
As well as the quarterly bulletin, data for house prices and mortgage approvals will be released, as well as the final cut for Q4 ‘22 GDP. This is likely to be flat quarter-on quarter, leading to a 0.4% increase year-on-year.
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Consumer Confidence and House prices due this week
While this is not being stashed under the mattresses of various CFOs throughout the country, there has been a trend among both companies of all sizes and individuals to diversify their cash holdings and not place all their eggs in one basket.
This has reversed a trend which had seen partnerships built between banks and their customers, where access to several banking products and solutions were linked to the size of customer’s deposits.
The current situation is almost entirely due to a lack of confidence in the financial system which has been, to a great extent, exacerbated by the seeming unwillingness of the Treasury to act to ensure that banks are able to maintain sufficient liquidity.
Janet Yellen last week declined to agree that the Administration would move to guarantee 100% of all deposits held in banks. This would have seen a probable end to turmoil. She believes that the current situation where the Federal Deposit Insurance Corporation guarantees only deposits of $250k and below is sufficient.
In turn, this has led to the diversifying of deposits away from regional banks into the larger money centre financial institutions.
The threat of a recession that has hung over the economy since the third quarter of 2023 when the Federal Reserve saw fit to hike interest rates in increments of seventy-five basis points remains, although the likelihood is now seen at less than 30%.
The current liquidity crisis that is affecting the financial market may see the Central Band end its current tightening of monetary policy after one more hike.
That is the view of the St Louis Fed. President James Bullard. His colleague on the FOMC, Neel Kashkari President of the Minneapolis Fed., commented over the weekend that the current crisis brings the possibility of a recession closer, but an end to the programme of hikes will end that concern.
The dollar index closed a turbulent week at 103.11, having earlier fallen to a low of 101.99.
This week will see the release of house price data, which will go some way to determining how much of an effect the raising of short term interest rates has had on families medium to long-term plans.
ECB last hawk standing as euro chases 1.10
The fact that the ECB will remain the most hawkish Central Bank in the G7 will also mean that it is the most likely to drive its economy into recession.
The most recent meeting of the Bank’s Governing Council ended with its President tempering her hawkish remarks, but there appears to be no letup in the desire of the so-called frugal five to hike interest rates until inflation is provably under control.
There are only two monetary policy meetings scheduled for the second quarter and and unless there is a significant increase in the turmoil currently being seen in the financial market, the Bank is likely to raise rates at each of them
Towards the end of last week and over the weekend, there were serious rumours being spread about the health of the balance sheet of Germany’s largest bank. This prompted the German Chancellor, Olaf Scholz and the President of its Central Bank Joachim Nagel, to assure the markets that Deutsche Bank is no Credit Suisse.
Analysts at Citibank agreed with their assessments, saying in a note to investors that Deutsche Bank is little more than a victim of an irrational market. Nonetheless, shares in the German lender fell by 14% on Friday.
With the ECB remaining in hawkish mode and economic output rising significantly last month, the euro looks likely to challenge the 1.10 level versus the dollar. Having established base camps at lower levels in the past few weeks, it appears to be ready for the final assault on the perceived summit.
Last week, it rose to a high of 1.0929, but was unable to retain its momentum, and it fell back to close at 1.0759. Investors still aren’t able to find the level of confidence in the single currency to take a long term view, but the longer it is able to remain at elevated levels, the more that confidence will grow.
This week, The influential IFO Institute will publish its assessment of the German business climate, as well as its future expectations.
Later in the week, business confidence data will be released for the entire Eurozone, as well as German inflation and employment figures.
Have a great day!
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24 Mar - 27 Mar 2023
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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.