WeeklyWatch – UK, US and European banks all raise interest rates by 0.5%

20 December 2022

Stock Take

While many eyes across the globe were focused in anticipation of the Argentina and France World Cup final last week, conversations were being had by the three main Western central banks, in which all decided to raise interest rates by 0.5% within 24 hours of each other.

However, there was a noticeable difference in the messaging that accompanied these actions.

On home soil

Governor of the Bank of England (BoE), Andrew Bailey, was more optimistic. He said:

“We think we’ve seen possibly this week the first glimmer, with the figures released this week, that it’s not only beginning to come down, but it is a little bit below where we thought it would be and that is obviously very good news.”

Bailey shared this after UK inflation dropped from its multi-decade high to 10.7%. Any indications that inflation may finally be declining after dominating much of the economic discourse for a year will be very much welcomed. However, inflation still sits well above the BoE’s 2% target, and even Bailey said there is a chance it may not decline as he had hoped, due to a tight labour market.

The BoE’s decision to increase interest rates to 3.5% on Thursday was influenced by these risks.

Mark Dowding, Chief Investment Officer at Bluebay, said that the BoE has traditionally used rather gentle language in its messaging. He said the bank is “acutely aware of the mortgage rate pass through on households already reeling from higher energy costs”. Adding to that:

“Our 2023 outlook continues to foresee the BoE under delivering versus market expectations, struggling to raise rates above 4%.”

Dowding suggests that this more accommodating stance might contribute to the prolonging of the UK’s inflation problems.

In the eurozone

The European Central Bank likewise increased interest rates last week by 0.5%, but the tone of the announcement was less upbeat about the future. Following the news, ECB President Christine Lagarde stated that she anticipates interest rates will continue rising sharply in light of a substantial upward revision to the inflation outlook.

Azad Zangana, Senior European Economist and Strategist at Schroders, said:

“Money markets had priced the peak in the main ECB interest rate to reach between 2.75% and 3% early next year. However, the signal from the ECB seems to suggest that the terminal rate [highest point] may now need to be higher given the worsening outlook for inflation.”

Across the pond

The US fell somewhere in the middle of these positions with the Federal Reserve increasing interest rates by 0.5%.

Since June, US inflation has been gradually declining, but Fed Chairman Jerome Powell remarked that “we still have some ways to go” in order to get inflation to a more manageable 2%. Dashing hopes that interest rates would start to be cut in the near future, he added:

“I wouldn’t see us considering rate cuts until the Committee is confident that inflation is moving down to 2% in a sustained way.”

This message was sufficient to send markets into a retreat, with the S&P 500 and tech-heavy NASDAQ both declining by over 2%.

Wesley Johnston, Senior Portfolio Manager and Research Analyst at Sands Capital, noted:

“When we talk to companies, we hear that they feel much better about their labour situation today than they have at any point in the past 18 months. The supply chain has also improved a lot.”

He continues by saying that many company valuations have already accounted for a large portion of the effects of inflation. Investors will be hoping that this results in a brighter new year after a challenging 2022 comes to a close and 2023 gets under way.

Wealth Check

Retirement Living Standards

With more information, choices and responsibility for our retirement savings, the question to ask yourself is: will I be able to build the future I really want? And this essentially boils down to asking yourself how much money you’ll need for a happy and enjoyable retirement.

The UK’s Pensions and Lifetime Savings Association (PLSA) launched the Retirement Living Standards, which aim to provide an answer to that exact question. It has been created to help people visualise the type of lifestyle they might like to have in the future.

The guidelines, which are broken down into three categories – minimum, moderate and comfortable – have been created to serve as a practical and meaningful starting point for anyone who is unsure of how much to save.

Minimum, moderate and comfortable

The goal of the PLSA is for the Retirement Living Standards to be widely accepted as an industry norm, much like the five-a-day healthy eating movement.

The minimum living standard provides for most people’s basic needs as well as some extra money for fun, which includes going to social events. For instance, you may go on holiday in the UK, go out to eat once a month and do some affordable leisure activities twice a week.

In addition to the minimum lifestyle, the moderate lifestyle offers additional financial security and more flexibility. For instance, you might go on a two-week holiday in Europe and dine out a few times every month.

At the comfortable level, retirees could indulge in some luxuries like recurring beauty treatments, theatre outings and three weeks of travel to Europe a year.

Let’s talk numbers

According to the trade association, a single person in the UK will need £10,900 per year to maintain the minimum living standard, £20,800 for a moderate and £33,600 for comfortable. That’s £16,700, £30,600 and £49,701 respectively for couples.

The PLSA estimates that even if you are eligible for the full State Pension of £9,627.80 per year in 2022/23, you’ll still need to accumulate a pension pot of at least £590,000 to have a comfortable retirement.1 This applies if you wish to convert your pension into an annuity, which provides you with a lifetime of guaranteed annual income in retirement.

Many retirees may be surprised to hear how little income their savings would provide given the average amount sitting in pension pots after a lifetime of saving is £55,900.1

Tony Clark, Head of Retirement Marketing at St. James’s Place, says:

“There’s still a long way to go in terms of raising awareness. It’s vital to realise that building a decent retirement pot means being engaged with the process early on.”

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.


1 Retirement Living Standards, Pensions and Lifetime Savings Association, 2021

In The Picture

As of 2022, inflation has risen to levels not seen in decades in the West. (Sources: the US The Bureau of Economic Analysis, The UK Office of National Statistics and Eurostat.)

The Last Word

“World champions! I dreamed about it so many times; I wanted it so much that it hasn’t clicked yet, I can’t believe it.”

Lionel Messi celebrates winning the 2022 World Cup

Bluebay, Sands Capital and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2022; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 20/12/2022