William John Market Report 05-11-21
William John Market Report 05-11-21Category: Reports
The Bank of England announced in October that inflation was likely to hit 5% year on year by early spring 2022, around the second quarter. For a central bank with a 2% per year inflation target, a 5% rate of inflation is certainly concerning and on 04/11 the Monetary Policy Committee (the committee that decides on adjusting interest rates or policies concerning the money supply) decided to retain rates at 0.1% – the record low interest rate that the Bank introduced with the outbreak of the COVID-19 pandemic.
A retention of the interest rate set at 0.1% surprised markets, with 2-year UK Gilts seeing their largest surge since March 2020:
Source: William John Analytics, MarketWatch.com
Looking at the yield on the 2-year UK Gilt, which moves inversely to bond prices, it fell 0.21 percentage points lower on 04/11 to 0.48% after the announcement that the Bank was going to pause on a rate rise, following a general uptrend in yield through October with markets anticipating a rate rise as concerns mount that Western Central Banks, including the Bank of England, need to reverse their monetary policies.
The decision came just a few days after the Federal Reserve had announced it was going to start tapering its $120 billion per month bond purchasing programme – part of its ‘Quantitative Easing” programme that aims to keep markets liquid and provide cash to large companies and financial institutions. The announcement also followed monetary reversals by the Reserve Bank of Australia and the Bank of Canada – both deciding to tighten their monetary policy by abandoning yield controls on bonds and reducing asset purchasing respectively.
Despite the shock to markets, which saw the Pound Sterling fall 1.5% to $1.352 after the announcement, buoying the rate to 0.1% is likely to be short lived, as it currently would put inflation on a trajectory to correct in 2025 – far too late within the boundaries of the Bank of England’s forecasts which predict inflation to fall below 3% by Spring 2023.
With large cap equity markets looking healthier than ever and UK output returning to pre-pandemic levels, the UK economy is certainly able to raise the cost of borrowing. A rate rise and overall monetary policy tightening agenda is needed to prevent an overheating of an economy that has been dealing with the turmoil of multiple energy crises and supply chain disruption including: a poultry shortage, a fuel crisis and a shortage of abattoir workers, just to name a few problems that have occurred over the last few months.
On this basis, expect a reduction in quantitative easing asset purchasing and a rate rise by the Bank of England by Q1 2022.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.