Stock markets have started the year well, with strong positive returns from both global equities and bonds as investor sentiment turned more optimistic on the lower inflation narrative and prospect of the US central bank getting close to the end of its interest rate hiking cycle. Investor sentiment has also become more upbeat following the reopening of China’s economy with the removal of its zero-Covid policy.
We expect the inflation and interest rate dynamics to continue to be at the forefront of the media agenda throughout the course of this year and influence financial market prices.
How will inflation and interest rate changes affect you?
Last week the Bank of England provided their latest assessment of the UK economy with details on the path of inflation, economic growth and labour markets. Their projections saw large revisions to previous forecasts. The decline in UK economic growth this year is now expected to be less severe than initially thought, and also provided a more optimistic outlook for inflation and unemployment over the next three years.
What does all this mean for you the investor? Our expert Investment Management team provided their views on the latest Do More With Your Money show.
Inflation
Inflation continues to be the dominant narrative globally. The more recent inflation data in the US and UK has been encouraging.
US inflation peaked in June last year at 9.1%, which has come down to 6.5% today.
In Europe and the UK inflation is at 8.5% and 10.5% respectively, which is trending lower from their peaks albeit at a more gradual pace.
The combination of falling energy prices and base effects in the inflation calculations should see the falls in inflation rate accelerate in the coming months which will be a positive for households and businesses.
Interest rates
With inflation trending lower it has eased the pressure for central banks to keep raising interest rates aggressively.
The US central bank, the Federal Reserve, has stepped down the pace of raising interest rates over the last couple of months. For context, last year the Federal Reserve raised interest rates by 0.75% at four consecutive interest rate meetings. Last week they raised interest rates by just 0.25%.
For the Bank of England, they too raised interest rates last week, with an increase of 0.5% which put interest rates at a 14 year high of 4%. The aim of raising interest rates is to slow the economy, rebalance demand and supply imbalances and bring inflation back to the 2% inflation target. The Bank of England Governor, Andrew Bailey, hinted that interest rates are closer to their peak and the Monetary Policy Committee may only raise rates further if inflation remains higher than expected.
What else have the Bank of England said?
Whilst the Bank of England acknowledges that the UK may enter a recession in 2023, it will be shorter and less severe than the Bank previously estimated as energy bills fall, and overall inflation is rising at a much slower pace. The Bank also said this could mean that a result fewer people are likely to lose their jobs.
How can you keep updated with what happens next?
By subscribing to the True Potential YouTube Channel you can be notified when our daily Morning Markets videos are live. These updates from our expert Investment Management team will give you the latest market movements, and analysis on central bank actions.
You’ll also enjoy our weekly Do More With Your Money show, with our expert panels reacting to the latest topical markets and investment moves that affect you.
With Investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. This blog does not constitute a personal recommendation or financial advice.
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