Markets have been jittery, positive on US jobs data but then negative with expected interest rate increases and banking sector collapse contagion risks.
True to form, the Federal Reserve increased interest rates in the US by 0.25% pa from a range of 4.75% to 5.0% pa to a range 5.0% to 5.25% pa. This is the highest base rate in the US for 16 years and its 10th increase in 14 months from 0% in March 2022. Whilst US inflation is much lower at 5.0% pa, positive jobs data and increased employment will mean more money in pockets pushing inflation up, hence the rate increase to try and steady the inflation rollercoaster.
Meanwhile, today in the EU, with average inflation across nations at 7% pa, the European Central Bank (ECB) raised interest rates again to fight inflation by 0.25% to 3.25% pa effective from 10 May 2023. In addition, the ECB is cutting back its debt buy back programme to zero. Effectively, stopping pumping money back to the financial sector.
In keeping with the trend, we expect the Bank of England to increase interest rates by up to 0.5% pa next week. We have much higher inflation at over 10% pa and we would prefer a harder increase now to tackle inflation rather than slower rate increases and longer pain.