Is This The End Of Interest Rate Increases?

Is this the end of interest rate increases in the UK, USA and the European Union?

For the first time since late 2021, the Bank of England (BoE), Federal Reserve (Fed) and the European Central Bank (ECB) have all left interest rates on hold. Leaving rates at their highest level since the financial crisis of 2009.

All three central banks have been quick to stress that their options remain open. So another rate increase cannot be completely written off. However, the signs are there that we could be moving from a period of significant monetary tightening to a period of monetary easing.

Currency Exchange Rates Update

The Pound is back up to its 50% one-month trading line against the Euro. Trading 3.5% above the 12-month low registered on 5 February. But still 1.8% below the 12-month high registered on 12 July.

Against the US Dollar, the Pound finished last week at a 3-week high. Trading 11% higher than the 12-month low registered on 4 November 2022. But still 6% lower than the 12-month high registered on 14 July.

Against the Australian Dollar, the Pound is trading 10% above the 12-month low registered on 8 February. But still 5% below the 12-month high registered on 19 August.

What’s In The News?

In The UK…

A major Sky/YouGov poll throws up the possibility that the next UK general election ends up being ‘the apathy election’?

The poll shows that 1 in 10 people who voted Conservative in 2019 would switch to Labour! With slightly more opting for Reform UK. Only 4 in 10 indicate they would still back the Tories. The poll also shows that both Rishi Sunak and Sir Keir Starmer are in negative territory with voters. Sunak commands a net approval score of 7% while Starmer is deep in the red at –61.

Rather than a ‘new dawn’, could it be more of a ‘collective shrug’ that gets Labour into No 10?

Good News

The BoE kept UK interest rates unchanged for the second month in a row,. However, Governor Andrew Bailey said “Interest rates would probably need to stay high for some time to tackle inflation.”

The BoE also published its updated projections for the UK economy. These point to a weaker near-term outlook. Including a 0.5% downgrade in 2024 GDP growth to zero. Whilst headline inflation has fallen from a peak of 11.1% to 6.7% in twelve months, the BoE expects it to fall to less than 5% before year-end. The BoE also increased its estimate of the equilibrium rate of unemployment from 4.25% to 4.5%.

In short, this means that the BoE thinks it needs to see a higher rate of unemployment in order to bring down wage growth. That in turn will bring down inflation in the medium term.

The UK launched the AI Safety Institute after global leaders agree a plan to test the safety of emerging types of Artificial Intelligence (AI).

The UK also agreed two partnerships with the US AI Safety Institute and with the government of Singapore. Providing a collaboration on AI safety testing. Both are two of the world’s biggest AI powers.

The October Lloyds Business Barometer showed a rebound in overall confidence to its second highest level for the year and means confidence remains well above its long-term average. Sentiment improved about both the general economy and businesses’ own prospects.

he British Retail Consortium (BRC) reported that food price inflation dipped in October to 5.2%. The lowest rate of increase in 14 months.

Energy Minister Claire Coutinho said “The approval of 27 new drilling licences in the North Sea will reduce Britain’s reliance on expensive energy imports.”

The UK is set to axe the banker bonus cap. This was inherited from the EU as part of post-Brexit push to boost the City of London.

The latest HSBC Innovation Banking and Dealroom figures show that UK venture funding roars ahead of its European rivals. Due to a pickup in venture capital investment in the third quarter that has taken the UK further ahead of its European rivals.

The UK remains by far the leading destination for VC investment in Europe, with $15bn raised in 2023 so far and $4.9bn added in the third quarter of the year whilst French start-ups raised $2.5bn in the third quarter while German firms bagged $1.7bn, in second and third place in Europe respectively.

The UK numbers mark a 14% boost on the previous quarter and places the UK firmly in third place globally behind the US and China.

Not So Good News

The S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) composite flash purchasing managers’ index (PMI) for October indicates that Britain’s services businesses suffered a loss of momentum for a third month in a row in October. Adding to signs the economy is making a weak finish to 2023 . Due toa combination of high interest rates and cost of living pressures weigh on demand.

The survey found services businesses, which make up 80% of the UK economy, had their lowest confidence so far this year.

It comes as separate data from the BRC (British Retail Consortium) showed footfall at UK retailers fell by 5.7% in October.

The Chartered Institute of Procurement & Supply (CIPS) the UK manufacturing purchasing managers index (PMI) recorded the deepest downturn since the 2008 financial crisis.

The UK Insolvency Service reported Insolvencies at their highest levels since 2009. Up 10% in the third quarter of 2023 compared to the same quarter of the previous year. While the number of creditors’ voluntary liquidations were the highest since 1960.

The UK Information Commissioner’s Office (ICO) has found ex-NatWest boss Alison Rose guilty of breaching data rules. This was in the Nigel Farage debanking scandal by inappropriately shared Farage’s personal information with a journalist.

In The USA…

The Federal Reserve held interest rates at their 22-year high.

Federal Reserve Chair Jerome Powell hinted the US central bank may now be finished with the most aggressive tightening cycle in four decades.

The Labor Department said the US economy added 150,000 in October, slightly below a Dow Jones forecast of 170,000.

Average hourly earnings, a closely watched data point in the report for inflation trends, rose 0.2% last month. Also a smaller-than-expected increase. The unemployment rate climbed to 3.9% versus a forecast of 3.8%.

Meanwhile, US economic growth accelerated to 4.9% in third quarter, its quickest growth pace in almost two years.

According to an annual survey by Gallup, the number of Americans saying that they trusted the media a great deal or a fair amount reached a new all-time low of 32%.

In The EU…

The ECB’s key interest rate remains at 4%. It too opted to pause in October after 10 consecutive rate rises. The interest rate rises have helped to bring down inflation across the EU. However, the costs are becoming clear as growth contracted in the third quarter. Eurostat figures showed that GDP fell by 0.1% between July and September.

Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics said “the big picture is that the eurozone is struggling.”

Inflation across the euro zone dropped to a two-year low of 2.9% in October, down from 4.3% the previous month.

Others

Chinese factory activity fell back into contraction during October and expansion in the services sector unexpectedly eased. Indicating that the economy remains fragile with soft consumer confidence, declining export demand and the ongoing turmoil in the country’s property sector all weighing down the economy.

China’s Real Estate Crisis matters given that Real Estate accounts for such a large part of the Chinese economy. It also matters to the global economy for two reasons. Firstly, the IMF is cutting its global economic growth forecasts. This is due to the implosion of the largest Chinese Real estate companies such as Evergrande and Country Garden. And secondly, with Chinese developments mothballed and a hold on new ones, there is a huge drop in demand for concrete, steel, and glass.

Australia’s central bank, the Reserve Bank of Australia (RBA) meet tomorrow. Unlike the big three (BoE, Fed, and ECB) is expected to raise interest rates following the release of higher-than-expected domestic inflation figures.

The Australia Bureau of Statistics (ABS) said inflation rose by 5.4% in the 12-months to the end of the third quarter, exceeding estimates.

FTX founder Sam Bankman-Fried was convicted by a New York jury in one of the biggest financial frauds on record. It’s likely to condemn the former crypto tycoon to decades in prison and bolster US authorities’ attempts to bring an unruly financial sector to heel. The crypto entrepreneur was convicted on all seven charges of fraud and conspiracy by a 12-member jury at a Manhattan federal court. The ruling follows a month-long trial where former FTX executives pleaded guilty to fraud charges and testified against him. Prosecutors said Bankman-Fried stole at least $10bn from FTX customers and investors.

Lastly, spare a thought for borrowers and mortgage holders in Turkey after Turkey’s central bank raised its key interest rate from 30% to 35% in an ongoing bid to rein in inflation which is forecast by the Turkish central bank to reach just over 60% by the end of 2023.

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Quote

This week’s quote is from British journalist Miles Kingston

“Knowledge is knowing that a tomato is a fruit. Wisdom is not putting it in a fruit salad.”