Your weekly economic update from the team at FXD Capital
The Bank of England flinched and increased rates Thursday, while the 0.15% raise to 0.25% was a pyrrhic victory inflation doom-mongers, a series of events intertwined with the decision were more intriguing to indulge with comment. Firstly, the IMF publicly castigated the BOE warning them not to let inflation run amok and return the economy to the dog days of the 70s. Underneath the PR, such a move came across as a vote of no confidence in the bank’s objectivity. After all, the BOE is the first major western nation to ratchet up rates. My instinct says that the BOE was compelled to raise rates by the maelstrom of criticism around it than their own internal thesis.
In the end, we’re now back at 0.25%. The heady days of the 0.5% decade post-financial crisis looks positively luxurious in the face of such a spartan economy, but rates are on the way up. So the question is, what now? Don’t expect many defaults just yet; the delta of the change on a floating rate loan won’t be too arduous to service. The more interesting angle is what this down to the savings market? If easy money printing is on the wane and borrowers interest coverage ratio is under stress, will we see any movement in retail deposit pricing to firm up balance sheets?
In the face of inflation, which is projected to reach 6% in spring next year, there is an inherent risk in locking up cash in deposits that lose capital on a fundamental basis. Yet, with stock markets experiencing schizophrenia and debt markets assumed to be staring down the barrel, massaging an inflation loss on a benign deposit may be the best of a bad situation.
Raining on the BOE’s parade to an extend was the Federal Reserve. Who on Wednesday gave further comment about its intent to curtail asset purchase programmes as we advance. Stock indices have had a rough week, with the NASDAQ losing 2.1% on Thursday, its worse fall since the arrival of Omicron news in November. Jerome Powell’s Fed comments did assuage some fears as there was no concrete dates or policy, just conjecture and can-kicking. However, it was confirmed that three separate rate increases can be expected in 2022, which almost seems like a benchmark set for others to follow. Later on Thursday, the ECB completed the hattrick with news about its bond-buying programme ending in 2022, albeit after an actual increase in the pace of buying during the spring.
The UK is probably in the most delicate position relative to its developed-world peers at the moment. While the US has more rampant inflation, its economic malleability means effects are not as profound as in more fragile economies. However, aside from Omicron, which threatens the stability of recent lockdowns easing and calls for selective furlough arrangements in hospitality, inflation is the main bugbear for Britain. Moreover, labour inflexibility and Brexit bureaucracy put a downer on the UK in 2022.
While the labour market in some areas is buoyant, the bifurcation between lockdown winners and losers is stark. While together, the picture amalgamates and presents rosy pictures – growth up, employment up, it’s never uniform. The UK’s inability to elevate other cities and regions to similar prominence as London is an achilles heel that most other developed countries don’t have.
Indeed, UK economic activity growth is stalling. The IHS Markit flash composite fell over 4 points into December as Omicron curtailed recent momentum. Moreover, government policy to not explicitly call for lockdowns but essentially promote them (so as not to be the bearer of bad news) has seen the Christmas entertainment season decimated as case rises and people try to preserve festive get-togethers with isolation.
Combined with the political machinations swirling around the Conservative party, 2022 could bring interest rates rising over 1%, inflation sustaining at 5% and perhaps even a General Election if Boris Johnson cannot get out of his current predicament.
Inflation everywhere seems like a mix of narrative and numbers. While the tangible increase at petrol pumps and electricity meters is intertwined with bigger geopolitical games, some of the other increases seem to be based on fear and musical chairs mentality. When prices rise purely for the sake of it and to try and pre-empt hidden forces that may only be perceived, it does set the narrative that until normalcy is resumed both politically and economically, the UK will remain on eggshells.
All the best for the weeks ahead and season’s greetings to all
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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