As expected the Bank of England raised interest rates last week. The BoE hike of 0.75% was higher than some expected, and several of the members voted for smaller rate hikes. Overall, the BoE was more ‘dovish’ than markets expected with a downbeat economic assessment. The statement suggested that interest rates in 2023 and the terminal rate will be lower than markets currently expect. Inflation is forecast to peak just below 11% this year and to come down gradually in 2023. The energy prices and ongoing support pose a lot of uncertainty, but forecasts show inflation falling below 2% at the end of their 3-year forecasts.
The Bank concluded that “further increases in Bank Rate may be required”, but suggested this would be lower than current expectations (falling from 6% to 4.75%). The Bank’s forecasts do not take into account the fiscal policy changes that are due in the Autumn Statement on 17 November. This may have a further negative impact on the outlook for growth. Sterling fell, as a result, getting as low as 1.1150 against the US dollar.
The main data this week is the official GDP figures for September and the third quarter. The UK economy is expected to have contracted relative to the second quarter. The monthly GDP reports for July and August had already highlighted slowing momentum. A fall in September GDP of 0.5% will lead to a similar decline for the quarter, in line with the Bank of England’s prediction. The BoE expects the economy to continue to contract throughout 2023, suggesting that we are already in recession.
GBPEUR – 1.1392
GBPUSD – 1.1325
On the data front, it is a fairly quiet week for the Eurozone. German industrial production showed a surprising bounce this morning, increasing by 0.6% in September, against forecasts of minimal growth, or even contraction. The Retail Sales figures for the Eurozone are due tomorrow and are expected to show a small increase in September, though they will still be down on a year ago.
Beyond the data, there will likely be more interest in central bank speakers, with numerous additional European Central Bank speakers over the course of the week. Any hints on their views on policy direction could have an impact on the markets. We also saw the start of the COP27 meetings yesterday, which looks set to continue pressure on developed nations, in particular, to do more.
EURUSD – 0.9941
EURGBP – 0.8778
The Federal Reserve was matched last week by the Bank of England, as the Fed hiked rates by 0.75% to 3.75-4%. There was however a major difference in the tone and the market response. The initial reaction to the Fed’s decision was positive, as it indicated that the pace of hikes could slow from next month. Chair Powell’s comments were more hawkish about the need to continue raising interest rates to tackle inflation. As a result, markets have priced in higher terminal interest rates above 5% next year.
This week, the US midterm elections will determine whether the Republicans win control of Congress from the Democrats. It looks likely that the Republicans could gain a majority in the lower House of Representatives and they may also take control of the Senate. If this happens, it will President Biden’s ability to enact his agenda in the remaining two years of his term.
We also have some interest on the data front, with CPI inflation expected to edge lower to 8%. The rise in headline inflation has been skewed more toward domestic price pressures. The US labour market report showed earnings growth slowing to 4.7% in October. However, non-farm payrolls added a further 261k jobs, which highlights the tight labour market conditions. Core inflation has been edging higher and may well hit a new forty-year high of 6.7%. This will no doubt give the Fed pause for thought before slowing down rate hikes.
GBPUSD – 1.1325
EURUSD – 0.9941
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*Interbank rates correct at 7 am on the date of publishing.
