WeeklyWatch – UK sees highest interest rate since 2008

8 November 2022

Stock Take

Increasing rates and a recession warning in the UK…

The news has been dominated by talk of interest rates this week – indeed, as in many previous weeks – with both the UK and US making decisions about rate rises at the end of last week.

Seeking to limit inflation, the Bank of England (BoE) raised rates to 3% in the UK – a 0.75% increase. This is the highest overall rate since the 2008 recession 14 years ago and the biggest single increase since 1989.

The UK may now enter a recession for the next two years, as expected by the BoE, with inflation set to stay obstinately high.

And it doesn’t end here. BoE Governor Andrew Bailey admitted rates may well continue to rise. However, he said:

“Further increases in Bank Rate might be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.”

All in all, this doesn’t offer one clear message for investors. While there is no doubt that increased interest rates and a recession are decidedly worrying, encouragement can be found in Bailey’s comments that interest rates may not hike as much as some have been predicting.

This could in part explain the FTSE 100’s 4.1% jump over the week.

…while the US comes face-to-face with a similar fate

Meanwhile, in the US, the Federal Reserve made similar moves to the BoE, in hiking interest rates by 0.75% but with a softer message.

In a note, the Fed said:

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

But in the following press conference, Fed Chairman Jerome Powell worked to moderate expectations by pointing out that while it makes sense to slow the pace of fiscal tightening eventually, there is still some time before this will happen. The ultimate level of rates could end up higher than previously expected.

Considering all of this, Keith Wade, Chief Economist & Strategist at Schroders, noted:

“In the Q&A session, Powell added that the recent strength of the inflation and employment releases had led him to that view. This opens the door to a smaller rate rise in December, say 0.5%, but the tone of the press conference means it will require softer readings on inflation and the labour market. There will be two prints of each of these before the next Fed decision on 14 December. It would seem that the Fed has turned off the autopilot but remains to be convinced that it has reached its destination.”

Looking at stocks, the S&P 500 fell by 3.4%, while the tech-heavy NASDAQ plummeted by 5.7% with many tech-industry leaders including Meta and Amazon continuing to face the consequences of disheartening earnings results.

UK, US and China face big changes

In other parts of the world, Chinese markets saw positive movement following speculation that the government may relax its zero COVID-19 policy. Following this, the Shanghai Composite index jumped to 5.3%. However, over the weekend, these hopes were somewhat curbed when health officials said current Chinese policy would ‘unswervingly’ remain.

As we look to the upcoming week, markets could be affected internationally following several important events worldwide. This includes the US mid-terms, which could see President Joe Biden’s Democrats lose control of Congress. And in financial markets, the inflation rate for the US will be released on Thursday, with many hoping to see it fall below 8.0%.

Meanwhile back on home soil, the UK will release its preliminary third-quarter GDP data, which is generally expected to show a contraction.

Wealth Check

Sunday saw the launch of COP27 in Sharm el-Sheikh, Egypt. COP27 is a much-needed opportunity for global leaders to refocus on climate change.

It was only one year ago in Glasgow, that the world looked on as a historic climate change deal was announced at the COP26 conference. The deal concluded with agreement in many areas, with 190 countries pledging to phase out coal power and a commitment by 137 countries to “halt and reverse forest loss and land degradation” by 2030.

The war in Ukraine and the energy crisis have only emphasised the vulnerability of our current energy market and the importance of diversifying our energy sources since then.

The challenge for the leaders at this year’s upcoming climate conference is to refocus the world on fighting climate change and developing the successes of previous conferences. Themes of this year’s conference include:

Direct action to stop climate change
Climate education
Scientific innovation
Climate finance.

The most significant topic is what countries and other bodies will do to continue their carbon-cutting efforts, plus a look at adapting and building resilience to the impacts of global heating.

Petra Lee, Responsible Investment Consultant at St. James’s Place, says:

“COP26 received much attention, but that fell away quickly because of Russia invading Ukraine and the energy crisis. COP27 is a much-needed moment for us to refocus. While the energy crisis and Ukraine war are acute and front of mind, the climate-change crisis is chronic.

“People feel a sense of permanent crisis. But we must concentrate on solutions in our control. The future hasn’t been written yet and we can improve on previous decisions.”

With speeches from broadcaster David Attenborough and Barbados Prime Minister Mia Mottley, Petra says COP26 had a galvanising effect. Together, they helped spread a powerful message about climate change to a wider audience, while companies and investors pledged trillions of pounds to carbon-cutting targets, demonstrating how many are already aiming for net zero.

Petra continued:

“Companies’ share prices attract a premium because of that work. But investing according to climate principles also creates a powerful collective effect because it aligns the world’s capital with carbon-reduction targets; holds companies to account; and pressures them to put weight behind their pledges.”

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“There is no long-term prosperity without action on climate change. There is no energy security without investing in renewables. That is why I will attend COP27 next week: to deliver on Glasgow’s legacy of building a secure and sustainable future.”

– Rishi Sunak on the importance of COP27, which began on Sunday.

Schroders is a fund manager for St. James’s Place.

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