Weekly Brief: Another Rate Hike And Still Climbing

Weekly Brief: Another Rate Hike And Still Climbing

over 1 year ago3 mins

In what’s becoming almost routine, central banks in the US and UK announced massive interest rate increases. And while neither bank’s done hiking, one might be nearer to the peak.

🕰 Recap

  • The Federal Reserve (the Fed) held its penultimate meeting of 2022, and on Wednesday it pulled the rug from under the not-so-high for not-so-long hopefuls
  • A day later: the Bank of England (BoE) – "The Old Lady of Threadneedle" – followed the Fed’s lead but offered more comforting forward-looking words
  • But if you think the US and the UK have problems, try wrestling with 86% inflation. That’s what the Turkish inflation data for October showed

✍️ Connecting The Dots

Rate-setters are facing the unprecedented challenge of trying to douse a raging inflation fire while shepherding their economies away from a painful recession. In the eyes of the Fed, it’s clear which is the lesser of those two evils: recession. And it was probably September’s 40-year-high core inflation – that’s excluding energy and food prices – that spooked the Fed into its fourth-straight 0.75 percentage point hike and prompted it to warn of higher-for-longer interest rates to come.

Across the pond, though, the UK's central bank appears to be embarking on a different journey. The BoE continues to talk tough on inflation and did follow its US counterpart with a 0.75 percentage point rate rise – its biggest in more than 30 years – but the fragile UK economy is causing some sleepless nights. That’s why the bank was clear that too many more of these aggressive hikes would risk sending the British economy into a tailspin, and that it’s prepared to ease off on the rate-hiking peddle at some point.

These are certainly troubling times for developed economies, but spare a thought for Turkey. The country’s grappling with hyperinflation as food and non-alcoholic drink prices have doubled from a year ago. And its central bank’s unconventional rate-cutting approach seems to be making matters worse. That’s why the Turkish lira’s at an all-time low versus the US dollar, a tempting time for American tourists to experience some Eastern delights...

🥡 Takeaways

1. Home is where the debt is.

The divergence between the Fed’s pumped-up guidance on interest rates and the BoE’s not-so-fast commentary was noteworthy this week. The US economy does seem to be on a more positive footing, but there’s another factor at play: mortgages. See, US borrowers are able to lock in mortgage rates for up to 30 years – and the vast majority of them do – which makes them less sensitive to rate hikes. Not so in the UK, where a long lock-in lasts five years at best. No doubt this will have been on the BoE’s mind when it offered a glimmer of hope to the UK’s fearful and already cash-strapped homeowners.

2. It’s not the economy, stupid.

Neither the US nor the UK economies are having a good time of late, but few would argue that the UK seems worse off. So while US stocks are down more than 20% this year, it’s perhaps surprising that the FTSE 100 – an index of the biggest UK companies – has barely budged: it’s just 6.5% from its all-time highs. But here’s the thing: the stock market is not the economy, and while the US index is littered with once high-flying expensive tech stocks, the UK index is made up of old-economy titans that have profited from a weaker pound and higher commodity prices. But with global economies on the brink of recession, those favorable conditions may not be around for much longer, so there’s no room for complacency.

🎯 Also On Our Radar

Elon Musk can’t – or doesn’t want to – stay out of the headlines. The self-styled Chief Twit explained that lugging a sink into his new venture Twitter was about letting the news “sink in”. Maybe so, but Twitter employees might be getting that sink thrown at them with reports this week that Musk is planning to lay off half of the company’s staff. Certainly makes an entrance…

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