Weekly Market Update- Week Ending 08/09/2023

This week, the pound weakened against the dollar to a 3-month low following comments from the Bank of England (BoE) governor that cast doubts over the need to raise interest rates any further in the UK. He was keen to stress that he wasn’t providing formal guidance, but the market took it as a signal that a rise at the next meeting on the 21st September isn’t as nailed on as previously thought.

Andrew Bailey told MPs “I think we are much nearer now to the top of the cycle. And I’m not therefore saying we’re at the top of the cycle because we’ve got a meeting to come, but I think we are much nearer to it on interest rates on the basis of current evidence.”

Financial markets currently imply a peak rate of around 5.75% in the UK, which would mean a further 0.5% from the current level. Expectations are that once inflation is back towards the 2% target, the BoE will slowly start cutting interest rates, perhaps in the second half of 2024. Gilt (government bonds) prices enjoyed a welcomed bounce on the news, with yields falling as interest rate expectations moderated. His comments will please homeowners and mortgage holders, in particular those who face a steep rise in interest costs when their current fixed-rate deals expire.

One area of concern for central bankers in their battle against inflation is the recent rise in the oil price. On Wednesday, Brent crude oil climbed above $90 a barrel for the first time since last November as Russia and Saudi Arabia confirmed they would extend production and export cuts until the end of the year. Oil majors BP and Shell saw gains as a result; both now trade at six-month highs.

John Naylor, Chartered FCSI – Head of Investment Committee