WeeklyWatch – Are interest rate rises peaking or pausing?

26th September 2023

Stock Take

The latest inflation news

The first institution recognised as a central bank was Sweden’s Riksbank, which was founded in 1668. And last week, the Riksbank was just one institution holding rate-setting meetings, much to the intrigue of central bank watchers, while investors’ main concerns remained inflation and interest rates.

In the end, there was a mix of both surprising and predicted announcements. The Riksbank increased its key policy rate by the anticipated 0.25%, bringing it to 4%. However, many eyes were on the US Federal Reserve (Fed), which decided to leave interest rates unchanged on Wednesday.

Jerome Powell, chair of the Fed, released new projections suggesting most officials expect one more rate rise this year. He stressed that the Fed wants to see a further decrease in inflation beyond the improvements over the last three months.

The short-term outlook for interest rates

Fed officials seem more confident than ever that they can restore inflation to its target level without causing a devastating recession. However, Mark Dowding of BlueBay Asset Management feels that inflationary pressures might continue to hold strong due to ongoing resilience in the US employment market. He said:

“We continue to believe that inflation may remain stuck between 3–4% for some time, until policy tightening takes more of a toll on the economy later next year.”

Keith Wade, Chief Economist at Schroders, noted:

“Given the [Fed’s] unchanged inflation projections, this implies higher real interest rates. It also means there would only be scope for modest rate cuts in 2024. In the words of the Bank of England’s Chief Economist, the rate profile is now more Table Mountain than Matterhorn.”

BoE puts stop to interest rate increases

The UK attracted the most attention in Europe. After learning that UK inflation unexpectedly decreased in August from 6.8% in July to 6.7%, the Bank of England (BoE) decided to put a stop to interest rate increases the following day. The Bank had not left interest rates alone since December 2021. But the vote was closely divided (5-4), with Governor Andrew Bailey giving the deciding vote.

The move implied that worries about inflation are giving way to signs that the economy is entering a recession. The BoE predicted “weaker than expected” growth in the second half of the year and noted that threats to the economy were growing. Bailey emphasised once more that the Bank was prepared to take more action even though the financial markets believed its run of rate rises had come to an end.

UK retail sales rebound while PMI figures fall

After a rainy washout in July, official data revealed that UK retail sales largely rebounded in August. Food sales and a strong month for clothing were the main drivers of this recovery, although fuel sales declined as rising prices hurt demand. However, the statistics showed that sales volumes increased month over month for the sixth time so far in 2023, indicating that most consumers are managing the cost-of-living pinch.

On a more sombre note, in August, the UK services sector’s Purchasing Managers’ Index (PMI) data fell to its lowest level since the pandemic shutdown of January 2021, igniting recession worries and underlining the reason the BoE stopped raising interest rates.

According to analysts surveyed by Reuters, the ECB is done raising interest rates and will remain on hold until at least July 2024, after the previous week’s hike to a record high of 4%. According to PMI services data, the Eurozone’s manufacturing sector will be the largest drag on the economy during the third quarter. News that Germany’s economic activity had declined for a third consecutive month added fuel to the fire.

Investors keep a close eye on US interest rates

Unsurprisingly, as investors braced themselves for US interest rates to stay higher for longer, equities fell during the course of the week and US treasury yields rose to multi-year highs.

Taking into account the whole cycle of interest rates since the collapse of Lehman Brothers caused the Global Financial Crisis 15 years ago, Johanna Kyrklund, Chief Investment Officer of Schroders, comments:

“Investors should expect higher inflation and tighter economic policy for longer. Gone are the one-way streets of ‘FOMO’ equity markets dominated by the US and vanishingly small bond yields. It’s time to return to careful analysis of winners and losers among companies – not just in the US. As an investor, you now need to think about what you did in the last decade, and then do the opposite.”

Wealth Check

Any of us could become vulnerable in the future – near or distant. In fact, the number of vulnerable persons has increased since Covid and the current cost of living crisis. In May 2022, the Financial Conduct Authority (FCA) reported that 47% of the UK population showed characteristics of vulnerability – struggling with daily life and everyday decisions.1

What does vulnerability mean?

Everybody has moments when they can’t sleep because they’re worrying about how to make ends meet. But vulnerability goes far deeper than a sleepless night. It can have a terrible impact on both our financial and physical well-being. The FCA has developed some precise definitions that will help us understand what vulnerability means. It’s guidance states that vulnerability should be considered as a “spectrum of risk” and “all customers are at risk of becoming vulnerable.”2

Making decisions or seeing things clearly will be more difficult for those in vulnerable circumstances. For instance, the menopause or long-term Covid might cause ‘brain fog’ which can cloud judgements. It can be far too easy to make decisions now that you may regret at a later date.

The FCA identifies four main ‘drivers’ of vulnerability that might weaken our financial, emotional or physical resilience:

  • Our health – A sudden medical emergency or a chronic illness might make us more vulnerable and have an effect on our personal finances.
  • A major emotional life event – Such as losing a loved one or ending a relationship.
  • A significant financial life change – Such as being laid off or the end of a business.
  • Reduced capability – Poor financial knowledge or comprehension, or low self-confidence when managing money.

Most people would agree that experiencing ageing, losing a loved one or dealing with a chronic disease or disability might make us more vulnerable. However, such vulnerability can also easily go unnoticed by others.

It’s not uncommon to feel uncomfortable when talking about the circumstances around your or another person’s vulnerability. But remember, you don’t have to make decisions about your financial future by yourself. If anything unexpectedly happens to your long-term future, a financial adviser can help you plan appropriately. They can use their expertise and knowledge to point you in the right direction, while also keeping you safe from scammers or fraudsters.


1Financial Conduct Authority, 26th July 2023, based on a survey of 19,145 individuals.

2Financial Conduct Authority, ‘Guidance for firms on the fair treatment of vulnerable customers’, accessed September 2023.

In The Picture

In many of the world’s major economies, interest rates have increased. How do they stand right now?

Source: Trading Economics, data accessed 25/09/23.

The Last Word

“On HS2, we do have to respond to the budgets. We’ve been hit by not just coronavirus but also by the war in Ukraine, and I think any responsible government looks at that and says, ‘Does this still stack up?’”

– UK Defence Secretary Grant Shapps on the current speculation around the future of highspeed rail line HS2.

BlueBay 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.

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SJP approved 25/09/2023