Weekly Market Update: BoE raises rates to highest level since 2009

Read our full Market Update Week 31

Market Update

In local terms, equity markets fell across the board, aside from US equities which made a +0.8% return in USD (+1.5% in GBP). Global equities were flat in local terms but up +0.7% in Sterling as the Pound hit its lowest level since last September amid intensified worries over Brexit. In GBP both UK and European equities fell -0.5%. Having rallied strongly in the previous week, EM and Japanese equities suffered the most, falling -1.0% (-1.7% in USD) and -1.5% (-1.9% in Yen) respectively. As highlighted, the GBP had a difficult week, falling -0.8% vs USD, -0.6% vs JPY, and coming in flat vs EUR. These falls occurred even though the Bank of England raised rates to 0.75%. Government yields continued to rise across the board, with UK 10Y Gilt yields up 9.7bps, German 10Y Bund yields up 5.7bps and US 10Y Treasury yields up 3.2bps. In the commodities space, Gold continued to fall by -0.1%, while Oil made up the previous week’s losses by gaining +0.4%. Metals also fell -0.8%, all in USD.

View From The Desk

The Bank of England has increased interest rates beyond 0.5% for the first time since March 2009. While this sounds like a big moment, the reality is that this is still an extremely low level for interest rates. The Bank of England would like to start normalising interest rates (although what counts as ‘normal’ these days is up for debate) much in the same way that the Federal Reserve has been gradually, but consistently, increasing interest rates in the US since December 2015. There are several reasons for wanting to normalise interest rates, prime amongst them wanting more ammunition in the event of another recession, and the general belief that low interest rates fosters poor allocation of capital, reducing productivity in the long run. Unlike his US counterparts, Mark Carney is likely to find further rate rises in the near term more problematic. More rate rises are expected to be needed to keep inflation at 2% given low unemployment, low productivity and low net migration, however already sluggish growth and uncertainty over a Brexit deal, with a possible No-Deal outcome likely to cause significant disruption, are expected to weigh on committee members’ minds.

James Rowlinson, Senior Analyst