Week ending 23rd June 2023.

This week, central banks made it clear that the battle against inflation is far from over.

The Federal Reserve paused rate hikes last week to take time to assess the effects of their previous increases. However, the Fed Chair Jay Powell’s testimony on Wednesday and Thursday this week admitted that the fight against rising prices was not yet won, acknowledging that inflation was still surpassing the desired level. He further recognised that there was a significant gap to be bridged before reaching the target of two percent, signalling that subject to economic data, the Federal open market committee see further hikes going forward.

The UK is increasingly looking like the outlier with stubbornly high inflation. Many have placed the blame on the Bank of England (BoE)’s slow start to increase rates and the UK’s departure from the European Union which has led to increased import costs. This week, hotter than expected CPI data pushed BoE policymakers to hike interest rates by 50 basis points rather than the 25 initially expected.  The move marked the 13th consecutive hike since December 2021, taking interest rates to 5% – the highest since 2008.

The rate hike will put further pressure on borrowing, especially for the 1.4 million or so households that will look to re-finance their mortgages over the next six months. Many of whom took out mortgages at ultralow rates and will now face higher costs ultimately eating into their disposable income. Prime Minister Rishi Sunak is said to be making inflation his main priority, pledging to halve inflation this year to approximately 5%.

Despite the ongoing cost of living crisis, the UK continues to demonstrate resilience in economic activity. UK retail sales unexpectedly rose in May by 0.3%, following a 0.5% increase in April and greater than the 0.2% decline expected. The Office for National Statistics said sales were boosted by the warm weather.

As we have said all along, policymakers need to tread carefully as to not plunge the economy into a recession, but the question remains at what stage will higher rates start to feed through to materially impact businesses and consumers?

Geopolitical ties between India and the US were strengthened this week as Indian Prime Minister Modi visited Washington. The countries discussed deepening defence ties, collaborations in technology and India’s role in the Indo-Pacific.

With a trade value of $130 billion in goods, the US has emerged as India’s leading trading partner, while Delhi stands as the eighth largest partner for Washington. Despite these impressive figures, analysts and policymakers believe that there is a significant untapped potential for further expansion. Modi is actively positioning India as an attractive alternative to China, with aspirations to become a global manufacturing hub and a semi-conductor base.

Coming up next week we have US durable goods orders, US consumer sentiment readings from the Conference Board and University of Michigan, and the final estimate for first-quarter GDP. We also have Japan’s consumer confidence, Chinese manufacturing PMI, Eurozone inflation and unemployment. On Friday, PCE data will be released, the Fed’s preferred measure of inflation.

Kate Mimnagh, Portfolio Economist