Global Finance | 23 March 2023
Interest rates rise but the peak could be close
Central banks the US Federal Reserve and Bank of England raised rates once again this week, but such hikes could still come to an end sooner than previously expected.
Despite the recent impact of accelerated interest rate rises on the banking sector, the US Federal Reserve (Fed) and Bank of England still raised them by a further 0.25% this week.
This month, the banking sector felt the pressure of rising rates. We saw the collapse of Silicon Valley Bank in the US, and the waves of market contagion resulted in an emergency acquisition of Credit Suisse by UBS in Europe – even though it was not subject to the same issues as regional US banks.
These developments understandably caused concern, but the authorities acted very swiftly to stabilise the sector, which went some way to calming market jitters.
This increased the uncertainty around central banks’ decisions in scheduled interest rate announcements this week, according to Lilian Chovin, Head of Asset Allocation at Coutts.
Lilian said: “This is probably the first time in history where we went into a Fed meeting with expectations of three possible outcomes: a rate cut, no change, or a further rate hike.”
Fed’s dovish rate rise
The Fed’s 0.25% interest rate increase brought its Fed Funds target range to 4.75% - 5%. The central bank’s commentary suggested that the banking sector events influenced their decision, effectively signalling that rates were nearing their peak sooner than previously expected.
Monique Wong, Head of Multi Asset Portfolio Management at Coutts, explained: “The Fed Chairman Jerome Powell wouldn’t be drawn into a discussion around rate cuts. But the language used around rate rises was softer and there was an acknowledgement of the risks that tighter bank lending standards would eventually mean for the economy.”
The UK’s inflation battle
There was less of a surprise that the Bank of England raised rates by 0.25% to 4.25% in light of the higher February inflation print. Year-on-year inflation for February came in at 10.4%, up from 10.1% the previous month. This was after the figure fell over the three previous months.
Food and drink were a significant driver for this uptick in inflation, with prices rising at their fastest rate in 45 years. Even core inflation – price rises excluding volatile goods such as food and energy – took another jump, to 6.2% from 5.8%, in January.
What does this mean for portfolios and funds?
US Treasury yields on 10-year and two-year bonds fell by 0.15% and 0.26%, respectively. This was positive for our Defensive and Balanced mandates, which have notable exposure to government bonds. Also, financial credit is recovering from levels seen earlier in the week, which is encouraging.
Meanwhile, we have low exposure to bank stocks in our portfolios, and no exposure to small US banks.