Economic Highlights

The Monetary Policy Committee (MPC) of the Bank of England voted to raise the Bank rate once more, by 25bps to 4.25%, in line with the consensus and the latest market expectations. As was the case in each meeting of its current tightening cycle, the decision was not unanimous. This time, seven members voted for a 25bp rate rise, and two – Silvana Tenreyro and Swati Dhingra – voted for keeping the Bank rate on hold at 4%. The MPC noted the unexpected and unwelcome strength in the latest inflation reading, and the boost to GDP that is likely to come from the government’s Budget, which it expects to lift the level of GDP by around 0.3% over coming years. Turmoil in the banking sector was discussed, but the MPC appeared reassured by the briefing it received from the Bank of England’s Financial Policy Committee, which concluded that the UK banking system remained resilient, with banks ‘well placed to continue to support the economy in a wide range of economic scenarios’. This seems to leave the MPC free to focus on its main objective of bringing inflation back down to target. Although it was acknowledged that uncertainties around the financial and economic outlook had risen, guidance remains that ‘if there were to be evidence of more persistent [inflationary] pressures, then further tightening in monetary policy would be required’.

The Federal Open Market Committee (FOMC) announced a 25bp increase in the Federal funds target range to 4.75-5.00%, as expected. Although the decision was not a surprise, markets reacted to the change in language in the statement, which suggested that the Fed may be close to the end of its tightening cycle. Indeed, the committee no longer warned that 'ongoing increases' would be needed to bring inflation back to target, instead opting for softer language that 'some additional policy firming may be appropriate'. In the post-announcement press conference, Fed Chair Powell emphasised the 'some' and the 'may', further stoking expectations that a Fed pause will be sooner rather than later. Powell even conceded that a policy pause was considered for this announcement in light of the banking turmoil. However, given the committee's judgement that the US banking system remains 'sound and resilient' despite the collapse of Silicon Valley Bank and the recent string of relatively strong economic data, the Committee opted for a further 25bp hike. On top of this, Powell commented that the recent tightening in credit conditions may be equivalent to an estimated additional 25bp rate rise. Given such tightening in credit conditions and the financial stresses, where rates will go from here is still up for debate, but in its latest projections released alongside the announcement, the median view on the committee was for a peak rate of 5.1%, i.e. one more 25bp rise. This is unchanged from December, the last time the forecasts were published. Powell also rebuffed the futures curve, which is looking for cuts by the end of this year, stating that it was not the Fed's baseline case.

Having pre-empted other central banks with its own 50bps increase the previous week, the European Central Bank (ECB) was able to sit back and let the dust settle on the banking sector, although it was quick to lend its support to Deutsche Bank from the point of view of believing it to be a strong and well-capitalised institution. The latest S&P Global PMI data illustrated something of a bifurcation of sentiment within the economy. The Manufacturing reading slipped from 48.5 to 47.1 (vs 49.0 expected), while Services rose from 52.7 to 55.6 (vs 52.5 expected). Admittedly all the polling was done pre-Credit Suisse demise, but there are signs that the consumer is in better shape, with a big fall in oil and gas prices no doubt helping. One suspects that the disappointment in Manufacturing had a lot to do with previous over-optimism about the China re-opening story.

China’s Industrial Profits fell 22.9% in the first two months of 2023 compared with 2022. Some of this might have had to do with the timing of the Lunar New Year, but it also speaks to the slower-than-hoped for re-opening of the economy as well as some lagged cost increases coming through. Even so, this is a series that should improve as the months go by, and it should be noted that profits increased on a month-on-month basis from December’s level.