Week ending 18th March 2022.

We have had a week packed full of central bank monetary policy meetings, coupled with tentative progress in talks between Russia and Ukraine (neutrality) – which was not only positive for global equity markets, but it also helped take some of the speculative heat out of the oil price, which at one point this week traded back below $100 a barrel, compared to nearly $140 earlier this month.

In the US, Fed policymakers increased US interest rates by 0.25% – which was less than recent market speculation.

However, the accompanying ‘dot-plot’ (which shows the current view of where interest rates should go for each of the 18 Fed officials), was more hawkish than expected as it now suggests that policymakers will increase US interest rates by an average of 0.25% at each of the remaining six meetings in 2022.

Thankfully, the Fed dot-plot isn’t a forecast, let alone a commitment, it is simply the current view of the Fed officials, some of which aren’t voting members – and as such we are very sceptical we will see this magnitude of monetary tightening.

While we want lower inflation, we don’t believe an aggressive increase in interest rates is needed as today’s inflation is due to coronavirus-induced supply-chain disruptions and increases in the cost of commodities – and central banks are powerless to control this type of inflation with higher interest rates:  higher interest rates won’t make oil come out of the ground any faster, or harvest more crops.

Additionally, while we will undoubtedly see more persistent and noticeable global inflation than we have all gotten used to, the current ‘artificial’ inflationary pressures will quickly become next year’s ‘base effect’ – meaning we should see inflation numbers fall sharply once the war-induced oil-shock and supply-chain disruptions are behind us.

In the UK, yesterday (Thursday 17 March 2022) BoE policymakers increased UK interest rates by another 0.25% to 0.75% – and although this was expected given the recent comments from policymakers, interestingly the policymaker’s vote was split 8-1, as the deputy Governor Jon Cunliffe voted to keep interest rates unchanged.  This suggests that policymakers may be finally coming around to our view that our disposable income is already being squeezed by higher prices and that we don’t need to be squeezed any further with significantly higher interest rates.

And backing up our view, today the BoJ left Japanese interest rates unchanged at -0.1%.  Furthermore, Haruhiko Kuroda, the BoJ Governor, said that it wouldn’t be appropriate to tighten monetary policy because much of the expected increase in inflation will be a result of the transitory impact of the recent spike in commodity prices.

Looking ahead, we have a much quieter week with very little in the way of economic data.  Of most interest will be UK CPI inflation; UK retail sales; and US durable goods orders.  However, on Wednesday (23 March 2022), the Chancellor of the Exchequer, Rishi Sunak, delivers his Spring Statement to the House of Commons.

Investment Management Team