Established in 1668, Sweden’s Riksbank was the first institution recognised as a central bank. It was one of a host holding rate-setting meetings last week in a bonanza for central bank watchers, as inflation and interest rates continued to preoccupy investors.
As it turned out, there were both expected and surprise announcements. The Riksbank delivered its anticipated 0.25% rise, taking its key policy rate to 4%; but most eyes were on the US Federal Reserve, which on Wednesday elected to leave interest rates unchanged. Stressing that it wanted to see a further reduction in inflation beyond the improvements over the last three months, Fed chair Jerome Powell issued new projections indicating most officials anticipate one more rate hike this year.
Fed officials appear increasingly optimistic they will be able to bring inflation back to target without triggering a painful economic downturn. But pointing to continued strength in the US labour market, Mark Dowding of BlueBay Asset Management believes inflationary pressures could remain elevated, commenting: “We continue to believe that inflation may remain stuck between 3-4% for some time, until policy tightening takes more of a toll on the economy later next year.”
“Given the (Fed’s) unchanged inflation projections, this implies higher real interest rates. It also means there would only be scope for modest rate cuts in 2024,” observed Keith Wade, Chief Economist at Schroders. “In the words of the Bank of England’s chief economist, the rate profile is now more Table Mountain than Matterhorn.”
In Europe, it was the UK that grabbed most attention. A day after news that UK inflation unexpectedly fell in August to 6.7% from 6.8% in July, the Bank of England (BoE) hit the pause button on interest rate hikes. It was the first time since December 2021 that the Bank left rates unchanged. But it was a close call; officials were split 5-4, with Governor Andrew Bailey casting the decisive vote.
The move suggested concerns about inflation are giving way to signs the economy is slipping into recession. The BoE acknowledged that risks to the economy were gathering, and that it forecast “weaker than expected” growth in the second half of the year. Bailey again stressed the Bank was ready to take further action, although financial markets were betting it had reached the end of its round of rate increases.
After July’s rainy washout, official figures showed that UK retail sales partially recovered in August, driven by food sales and a strong month for clothing, although fuel sales fell as increased prices hit demand. But the data represented the sixth time so far in 2023 that sales volumes rose month-to-month, suggesting consumers are mostly coping with the cost-of-living squeeze so far.
On a gloomier note, Friday brought news that the Purchasing Managers’ Index (PMI) reading for the UK services sector dropped in August to its lowest level since the pandemic lockdown of January 2021, fuelling recession fears and underlining why the BoE halted its run of interest rate hikes.
Looking ahead, Hetal Mehta, Head of Economic Research at SJP noted: “Households and businesses will continue to feel increasingly constrained – even with the relief that comes with inflation moving lower. I don’t think the BoE can afford to take their eye off the ball – with wage growth still so high and inflation still far from the 2% target, it will be very difficult to signal a cut in interest rates in the near term. Higher for longer is consistent with getting the BoE regaining their inflation-fighting credibility.”
After the previous week’s increase to a record high of 4%, economists polled by Reuters believe the ECB is done hiking rates and will stay on hold until at least July 2024. PMI services data implied that the eurozone economy will contract in the third quarter, with the main drag coming from its manufacturing sector. Weighing further on sentiment was news that Germany’s business activity fell for a third straight month.
Unsurprisingly, stocks slid over the week and US treasury yields climbed to multi-year highs as investors hunkered down for US interest rates to stay higher for longer.
Considering the full cycle of interest rates since the Lehman Brothers’ collapse triggered the Global Financial Crisis 15 years ago, Schroders’ Chief Investment Officer, Johanna Kyrklund, suggests, “Investors should expect higher inflation and tighter economic policy for longer. Gone are the one-way streets of “FOMO” equity markets dominated by the US and vanishingly small bond yields. It’s time to return to careful analysis of winners and losers among companies – not just in the US. As an investor, you now need to think about what you did in the last decade, and then do the opposite.”
Any one of us can find ourselves vulnerable at any point. Since Covid and the cost of living crisis, the number of vulnerable people has soared. In May 2022, the Financial Conduct Authority (FCA) reported that 47% of the UK population showed characteristics of vulnerability – struggling with daily life and everyday decisions.1
What do we mean by vulnerability?
We all have nights when we lie awake worrying about money or how to make ends meet. But vulnerability goes much deeper and it can have devastating effects on both our financial wellbeing and our health. To help us understand what vulnerability means, the FCA has created some clear definitions. It’s guidance states that vulnerability should be considered as a “spectrum of risk”, and “all customers are at risk of becoming vulnerable.”2
People in vulnerable circumstances can find it almost impossible to make decisions or see straight. For example, the ‘brain fog’ that can be associated with long Covid, or the menopause, can cloud our judgement. It’s easy to make choices you later regret.
According to the FCA, there are four key ‘drivers’ of vulnerability that can damage our financial, emotional or physical resilience:
- Our health – a sudden medical emergency or a long-term health condition can increase our vulnerability and impact our personal finances.
- A major life event such as losing a loved one or a relationship breakdown.
- A life change that impacts our financial or emotional resilience, such as redundancy, or the end of a business or relationship.
- Reduced capability – low knowledge or understanding of financial matters, or low self confidence in managing money.
Most of us would recognise that becoming older, losing someone we love, or coping with a long-term disability or illness can make us vulnerable. Yet vulnerability can be all but invisible to the people around us.
It can be hard to talk about the circumstances surrounding vulnerability. But you don’t have to make decisions alone. Financial advisers can help you plan adequately if your long-term future has suddenly changed. They can apply their expertise and knowledge to guide you in the right direction, while also helping you stay safe from fraudsters or scammers.
1 Financial Conduct Authority, 26 July 2023, based on a survey of 19,145 individuals.
2 Financial Conduct Authority , ‘Guidance for firms on the fair treatment of vulnerable customers’, accessed September 2023.
In The Picture
Interest rates have risen across most of the major economies in the world. How do they currently compare?
Source: Trading Economics, data accessed 25/09/23
The Last Word
‘On HS2, we do have to respond to the budgets – we’ve been hit by not just coronavirus but also by the war in Ukraine and I think any responsible government looks at that and says, “Does this still stack up?”’
UK Defence Secretary Grant Shapps on the current speculation around the future of highspeed rail line HS2.
BlueBay and Schroders are fund managers for St James’s Place.
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SJP Approved 25/09/2023