Week ending 16th December 2022.

Central banks slowed the pace of interest rate hikes this week. The Bank of England, the Federal Reserve and the European Central Bank (ECB) all raised the rates by 50 basis points as markets expected.

The Bank of England voted by a majority of 6-3 to raise interest rates by 50 basis points to 3.5%. The governor of the Bank of England, Andrew Bailey, said that the Bank expects inflation to fall “quite sharply” by the middle of next year and expressed the need to balance increasing borrowing costs without having adverse effects on economic growth. In the UK, the number of people claiming unemployment benefits rose by 30,500 in November, the biggest increase since February last year. UK inflation eased to 10.7% last month, down from the October high of 11.1% and lower than expectations as transport costs fell back, particularly motor fuels. Bailey said that this week’s inflation data was a “glimmer” that inflation was easing and lower than the bank had anticipated.

The ECB and Fed have signalled more increases to come: US Fed Chair, Jerome Powell said that they would continue to raise rates into 2023 and said “the largest amount of pain, the worst pain, would come from a failure to raise rates high enough and from us allowing inflation to become entrenched”.

Whilst Fed policymakers said that they were encouraged by signs of slowing inflation, they said it would take “substantially more evidence” to be assured inflation will continue to fall.  Inflation in the US continues to show signs of easing, prices in the US slowed for a fifth consecutive month to 7.1% in November, the lowest since December last year, and below forecasts of 7.3%.

Elsewhere, at a Central Economic Work Conference this week China’s leader Xi Jinping and other officials promised to boost consumption and stimulate the private sector. China’s industrial production and retail sales fell below market expectations as the country continues to ease Covid-19 restrictions. However, the government is introducing further expansionary and supportive measures as officials have reiterated their determination to boost the gross domestic product. Officials said they will implement favourable policies to encourage private enterprises to grow and will likely target growth of 5% or higher next year. With China making up around 28% of the total global manufacturing output in recent years, these measures are supportive of both the domestic and global economy.

Next week looks quieter regarding economic data releases. We have US housing data, UK public sector borrowing and US initial jobless claims. We also have UK and US GDP for Q3, Japanese Inflation and Eurozone consumer confidence.

Investment Management Team