UK & US Likely to Raise Interest Rates Again

CENTRAL BANKS CONTINUE TO SEND HAWKISH SIGNALS This week has seen further moves to tighten monetary policy around the world. On Tuesday, the Reserve Bank of Australia raised rates by a larger than expected 50 basis points. That was followed on Thursday by the European Central Bank who confirmed that it will probably raise interest rates by 25bp on 21st July. In addition, it indicated that rates could be hiked by a further 50bp in September with further rises expected to follow. Those announcements continued the recent trend of central banks surprising markets with more aggressive than expected tightening moves. Unsurprisingly this has added to market angst. Government bond yields have risen through the week, with 10-year UK gilt yields, for example, hitting a new high for the year. While in another sign of nervousness, bond yield spreads between German and more ‘peripheral’ Eurozone markets moved to their widest since 2010. Equity markets remain volatile reflecting concerns that global economic growth could slow sharply. A risk that was highlighted in forecast updates by both the World Bank and OECD this week. Meanwhile, despite an initial boost to the euro from the ECB announcement, the US dollar seems to be ending the week higher.

FED UP YET AGAIN WITH MORE TO FOLLOW

The coming week will see several more central bank policy updates with potentially the most significant for markets being those by the Bank of England and the US Federal Reserve. The Fed seems set to add to the recent spate of aggressive tightening moves by central banks. In contrast, while the BoE is expected to deliver another rate rise, its message – and also the Bank of Japan and Swiss National Bank – may continue to be more cautious stressing the need to balance inflation concerns against downside growth risks. Recent Fed policy moves have been well flagged beforehand and that seems likely to be the case again with next Wednesday’s actions. A 50bp interest rate rise for the second meeting in a row seems a virtual certainty along with a repeat of previous guidance that rates will be raised by another 50bp in July. However, there is more uncertainty about what the Fed will say about what happens after that. There has been some speculation in markets that the following meeting in September may see the Fed ‘pause’ or at least lower the pace of its hikes to 25bp. The Fed will need to send some signals of its intentions and next week’s forecast updates including the ‘dot plot’ of interest rate projections can be used to do that. The last update in March showed a median expectation amongst policymakers of rates reaching about 1.875% by the end of 2023 (its likely level after the July meeting) and rising further to a peak of 2.875% by end of 2024. Now the Fed seems likely to raise this year’s end rate, possibly to 2.875%, and project further increases in 2024. That would send a signal that another 50bp increase in September is possible and crucially that rates are likely to be eventually pushed above their estimated ‘neutral rate’ of 2-3%. Overall, the Fed’s message is likely to be that they expect to be far from done with raising rates by September.

BOE ALSO SEEMS SET TO RAISE RATES AGAIN

On Thursday, the BoE’s Monetary Policy Committee is expected to increase interest rates for a fifth consecutive meeting by 25bp to 1.25%. It is probable that, as we have seen previously in this hiking cycle, there will be a vote split highlighting members differing views on the balance of inflation and growth risks. That said, the MPC’s potential reaction to the government’s recent fiscal package may mean that this particular move may be seen by markets as a slightly less ‘dovish hike’ than we have seen previously. Certainly, we will watch for signals on whether the MPC judge that the support could warrant additional monetary tightening. In particular, any changes in their policy guidance given that in May some members preferred to remove the need to indicate “that some degree of further tightening … may still be appropriate”. However, it may be that the Committee will hold off their judgement on this until their next set of forecast updates in August. In their May projections, the MPC pointed to inflation falling below the 2% target in 2024, conditioned on market expectations of a 2.5% Bank Rate. Since then, the economic data has been broadly in line with BoE expectations, the April inflation print was 9%, the labour market has continued to tighten, and survey inflation expectations remain elevated. Given this backdrop it seems likely that they will react to the continued upward move in market expectations for Bank Rate, which is now for it be 2.5% by year end and ~3% in Q3’23, by reiterating that these rates are excessive.

ECONOMIC DATA RELEASES MAY BE OVERSHADOWED

The coming week’s data calendar may be overshadowed by the monetary policy announcements. Nevertheless, it is busy, particularly in the UK and US, and the outturns may provide some important new insights into economic conditions. UK April GDP (Mon) is expected to post a rebound of 0.2% following March’s decline. However, that would still leave the 3-month growth rate at a modest 0.4%. Moreover, we estimate May retail sales (Fri) to have fallen by 0.6%. which will do little to boost growth expectations. Nevertheless, we expect Tuesday’s labour market report, primarily for the three months to April, will show that the market remains tight with consequent upward risks for wage growth. In the US, retail sales (Wed) and industrial production (Fri) are forecast to show that overall growth conditions currently remain solid. However, housing starts (Thu) may show signs of a negative impact from rising interest rates. At Heritage Pay, we specialise in high-value money transfers to emerging markets. We are particularly suited to helping individuals buying property abroad; importers paying foreign suppliers; and international investors. So to discuss how the above may affect your money transfer requirements, please contact your Currency Dealer at Heritage Pay on +44 (0) 207 117 2934 - free on WhatsApp.

None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.