The Pound started last week on the front foot against most currencies until Thursday when the Bank of England raised interest rates by 50bps- this, itself would usually be viewed as a hawkish moment from the Central Bank, however, commentary from Governor Bailey very quickly turned this pretty dovish- here is the TLDR from Thursday’s meeting;
- BoE expects inflation to peak above 13% and stay above 9% for the next year.
- UK is projected to enter recession in Q4 of 2022, and is expected to last 5 quarters.
- Interest rates could still be raised up to around 3%.
So what does this all mean? Unfortunately, nothing is good. The BoE has essentially stated they will hike their way into a recession, raising borrowing costs to slow down demand for things like housing. It is argued though, that this inflation spike has not occurred because the British Public is flush with cash and spending it, it is actually happening due to the rise in costs for food, fuel, and energy- so raising interest rates will actually just make things harder for the public, as they do not have the disposable income already. The recession is inevitable, and I do feel the UK is in for a tough time for at least the next year.
Politically, the next PM has a big job on their hands, with an emergency budget needed to assist the public with the constantly rising price of energy and fuel- hopefully this sort of fiscal policy is first on the agenda for the new PM when we find out in September who it will be.
The highlights for this week will be UK GDP, and U.S CPI, following the massive NFP data from the U.S on Friday showing over 500k jobs added last month, we may see CPI rise again, which will only encourage the Fed to raise rates again come September.
If you are planning currency transactions then it is best to keep your eye on the Central Banks and who is raising rates and by how much- most countries will now fall into recession, especially those who are having issues with rising energy costs alongside rising borrowing costs- unfortunately, there is no alternative but a recession in this scenario; If you have upcoming payments then please don’t hesitate to contact me to discuss a strategy.