Market Report : 03.02.23

Published: 03/02/2023 By ECAP

The Bank of England raised its key interest rate by another 50-basis points yesterday, warning that its battle against inflation still isn’t over, but held out the possibility of an end to its policy tightening. The move takes the Bank rate to 4%, the highest it’s been since the 2008 financial crash. Nevertheless, the Bank's calculations showed that current market expectations of a peak in rates around 4.5% in mid-2023 would push inflation below its 2% target in the medium term. That suggests it doesn't see the need to raise the Bank rate much more, if at all. However, the BoE was careful to add that uncertainties around this outlook are high and that "the risks to inflation are skewed significantly to the upside." Ultimately, by raising the cost of mortgage and consumer credit, the Bank threatens to sharpen an already clear economic downturn in the U.K. Moreover, the International Monetary Fund expects the U.K. to be the only G7 economy that will shrink this year – thus, further denting potential sterling gains.

The Euro found a lot of support yesterday as the European Central Bank raised interest rates by another 50-basis points and flagged its intention to hike rates by the same amount again in March. Policymakers remain focused on corralling elevated inflation despite recent data suggesting that prices may be peaking in the Eurozone. The decision, which was widely expected by markets, brings the interest rates on the ECB's main refinancing operations, marginal lending facility, and deposit facility up to 3%, 3.25%, and 2.50%, respectively. The ECB said it would "stay the course" with its recent monetary policy tightening to bring inflation back down to its 2% medium-term target, echoing language used by the central bank's president Christine Lagarde last month.

The dollar index fell to a nine-month low over the past couple of days following the Federal Reserve’s signal to end to its policy tightening cycle. The Fed raised the target range for fed funds by 25-basis points on Wednesday, to 4.50%-4.75%. However, chair Jerome Powell still said it was “premature” to declare victory over inflation, but acknowledged that a “disinflationary trend” has started. With the Fed out of the way, the market can look forward to more labour market data with Non-Farm Payrolls to be released today. There will also be durable goods and factory orders data, which will provide a cross-check to a worryingly weak ISM manufacturing survey published on Wednesday.