UK economics: Making sense in market mayhem
Prime Minister Liz Truss has begun her tenure with political and economic turmoil. Following the biggest level of tax cuts since 1972, expectations for the base rate peak have rapidly increased and the currency took a pounding.
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Interest rates will rise higher and faster
After the ‘mini’ budget on 23rd September the expectation for the future of the base rate rose 150bps to over 6% for April 2023.
At the time of writing this it has since receded by around 50bps after the Bank of England (BoE) stepped in to calm markets, essentially reversing its tightening course by restarting Quantitative Easing (QE) with a commitment to buy long-dated government debt. This is slated as a temporary measure.
Despite the QE the Bank remains committed to raising rates and we will likely see a significant increase in the base rate in early November, if not before.
Mortgage lenders were scrambled by pulling rates and some were quoting near 6%, more than treble the rate at the end of 2021 – mortgage affordability will continue to be stretched.
Mortgage costs will outweigh any consumer benefit from tax cuts
Inflation has and is continuing to rise across the globe, but the UK has one of the highest with double digits reached in July, 10.1%, yet this fell back to 9.8% in August.
The expectation is that with the energy cap put in place inflation will peak around 10-11% in the coming months. Notwithstanding any major supply chain disruption or geopolitical turmoil, we could be nearing the peak with producer price inflation easing in August.
A pounding in the currency markets
The US dollar continues to strengthen this year on the back of the Federal Reserve’s commitment to raise rates and its safe haven status. The pound dropped to its lowest level on record to $1.035 on the 26th September, it has since almost recovered but remains volatile and at lows last seen in 1985.
Dollar denominated buyers and those with currencies linked to the dollar have seen relative buying power increase and this could extend further, particularly as travel continue to bounce back.
We will almost certainly see what many define as a technical recession, potentially beginning in the third quarter of 2022 – on the upside after revisions, the economy expanded in the second quarter when previous estimates were a decline.
The truth is there won’t be clarity on the depth or length until it is over, hindsight is brilliant that way. Given many underlying factors, notwithstanding any sizeable shocks, I believe it will be shallow, something with which KPMG’s Chief Economist, Yael Selfin, agrees.
Read more or get in contact: Flora Harley, residential research