It was a volatile week for investment markets, as investors digested the fallout from the shotgun marriage of Credit Suisse and UBS Group, as well as further changes to monetary policy in the US and UK.
In line with expectations, the US Federal Reserve (Fed) and the Bank of England (BoE) both raised interest rates by 0.25% on Wednesday and Thursday respectively. In the US, this brings the rate to 4.75%-5% (the highest level since 2007), while in the UK, base rates are now 4.25%. The Monetary Policy Committee at the BoE voted 7 to 2 for the rise, with the 2 voting to leave rates unchanged. The market still predicts further rises from here, with the terminal rate currently expected to be around 4.5% in the UK and 5.25% in the States.
Central banks around the world face a bit of a dilemma. On one hand, the events of the last couple of weeks illustrate that the rapid rise in interest rates over the last 15 months is pressuring the banking sector and causing cracks to appear amongst its weaker constituents. On the other hand, inflation remains elevated and is proving stickier than many had hoped a couple of months ago. This is particularly true in the UK, which saw a surprise jump back to 10.4% in the year to February, from 10.1% in January.
It is very important from a market stability point of view that central banks retain their credibility and continue to view getting inflation lower as a priority. Fed Chairman, Jerome Powell, was keen to get that message across in the press conference that followed the interest rates decisions, insisting that “we have to bring inflation down to 2%. There are real costs to bringing it down to 2% but the costs of failing are much higher.” The Fed and BoE both skip April and meet next in May. Given the current pace of developments, it is difficult to call with much certainty what their next move will be.
John Naylor, Chartered FCSI – Head of Investment Committee