Weekly Market Update- Week Ending 22/09/2023
It is a busy week with Inflation data in the UK released, the Federal Reserve (Fed) announcing interest rates in the States and finally, the Bank of England setting rates.
The Office for National Statistics published new CPI data on Wednesday which showed inflation rose by 6.7% in the 12 months to August compared to 6.8% in July. The fall in inflation from the previous month surprised the market, with most analysts predicting an increase to 7% due to the recent pick-up in oil prices. A key metric for central bankers, core inflation (which excludes more volatile items like food and energy) was down from 6.9% in July to 6.2% in August. The pound was weaker on the news as investors lowered interest rate expectations, with sectors sensitive to rates such as property and domestically-focused companies enjoying a welcome bounce.
As expected, on Wednesday night the Fed held interest rates at a 22-year high at a target range of 5.25-5.5%. Chair Jerome Powell was keen to stress that while price pressures have shown some encouraging signs of easing, the challenge of getting inflation back down to a 2% target is far from over and opened the door to further interest rate rises before the end of 2024. “Inflation has moderated somewhat since the middle of last year, and longer-term inflation expectations appear to remain well anchored as reflected in a broad range of surveys of households, businesses and forecasters as well as measures from financial markets. Nevertheless, the process of getting inflation sustainably down to 2% has a long way to go,” he said.
Any parents who recently enjoyed a summer holiday involving a decent car journey will be familiar with the frequent calls, “Are we nearly there yet?” Investors were keen to ask the same question to the Bank of England ahead of their meeting on Thursday. With a vote of 5-4, the central bank surprised markets and held interest rates, perhaps now marking the top of the hiking cycle.
With an interest rate rise having looked nailed on a couple of weeks ago, the surprise fall in inflation earlier in the week perhaps tipped the balance for a couple of the members of the Monetary Policy Committee. I wouldn’t expect any cuts soon, though. Rates are now expected to be held while the bank monitors inflation in the months ahead. In a statement, the committee said, “Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.”
John Naylor, Chartered FCSI – Head of Investment Committee
