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Friday 4th August 2023
Friday Forward Guidance ... U.K. Rates Rise ... What Next ...
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| Hi Friend,
Bank Base Rate...
Last week, the Fed raised rates by 25 basis points on Wednesday. The ECB followed with a 25 basis point rise on Thursday. The MPC duly followed with a 25 basis point rise this week.
Where Are Rates Headed? Bet on higher for longer but probably not by much. A further 25 point rise is possible in the U.S. , Europe and the U.K. The Fed and the ECB prefer to keep markets guessing about what happens next..
Andrew Bailey, Governor of the Bank of England was equally enigmatic. "I am not going to judge what the path of rates will be, not least because more than one path may deliver inflation back to target. We will judge what is the most appropriate based on the evidence".
Yep, it's a bit like the path to spiritual enlightenment. One in which the progress to understanding the MPC doesn't come, all at once, and insight does not come gradually, if at all.
The committee voted by a majority of 6–3 to increase Bank Rate by 25 basis points to 5.25%. Two members, Jonathan Haskel and Catherine Mann preferred a 50 basis point hike. Silvana Tenreyro opted to maintain Bank Rate at 5.0%. So much for group think!
We maintain our base rate peak this year at 5.50% on the basis of a further 25 basis point hike in September. We model 4.50% as the long run rate for base rates and ten year gilts in life after Planet ZIRP.
Huw Pill chief Economist at the Bank of England, said there were “increasing signs” the Bank’s actions were working in pursuit of its inflation target of 2 per cent. "The fight against inflation is working”, but he went on to warn of the possibility that “we do too much” to bring it down.
Markets were concerned this week by the release of disappointing news from the housing and manufacturing sectors. Nationwide reported prices down by almost 4%. The seasonally adjusted S&P Global / CIPS UK Manufacturing PMI® fell to 45.3 in July, its lowest reading in the year-so-far. Should we worry about this? Not really Both house prices and manufacturing output reflect a reversion to trend rate, not a setback to growth.
The S&P Global / CIPS news from the construction and service sector was more upbeat. The SMMT car manufacturing data led to an increase in forecasts for registrations in the year. The Bank of England actually raised the GDP forecast for 2023 to growth of 0.5%. No recession in view, modest growth in prospect.
Short rates are stabilizing. Markets have priced in a lower peak of interest rates and the “swaps” rates that banks use to price mortgages have fallen. NatWest, Halifax and Virgin Money have cut rates this week by as much as 40 basis points in some cases. The changes followed cuts by Nationwide, Barclays, TSB and HSBC last week.
Rates for savers are increasing. Average rates on a one year ISA hit 5%. Rates on one year and three bonds offer 6% according to Moneyfacts Compare.
As
we have argued, higher rates are an escape from Planet ZIRP and a
return to normality. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%. Real GDP growth averaged 2.5%. There is life with higher rates, especially for savers.
No need for all that gloom and doom ... it's back to reality. |
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and commodity prices. Available on The Saturday Economist web site.
John |
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