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The Bank of England held interest rates at 5.25% for the fifth consecutive time

Watch our latest Market Moves, providing a round-up of the market movements and the global investment outlook for the week beginning 28th March 2024.

| 6 min read

This week Head of Asset Allocation Abbas Owainati reflects on market movements from the past week, provides an outlook on the economy more generally, and considers the implications of what is unfolding.

Transcript below:

Erica Whyte:

Thanks for joining us for market moves. My name is Erica Whyte alongside our head of asset allocation, Abbas Owainati. Here to break down the market-moving events that went on this past week, namely, the Bank of England has held interest rates at a very painful 5.25% for the fifth consecutive time. And then in contrast, the Bank of Japan has actually announced its very first rate hike since 2007.

But what is the impact on markets? Let's hear from the expert Abbas, thanks so much for being here. How are You?

Abbas Owainati:

I'm very well, thank you.

Erica Whyte:

What was moving markets last week, what can you tell us?

Abbas Owainati:

Indeed being central bank policy, the Fed, the Bank of England and the Bank of Japan all met and the focus was on forward guidance. The Fed also projects its future interest rate anticipations, what we referred to as the DOT plot.

Erica Whyte:

The dot plot.

Abbas Owainati:

Absolutely. 19 Fed members project their own anticipated interest rates and direction of travel for the course of the next couple of years. And the Fed dot plot suggested that there would be as many as three rate cuts through the course of this year. Now, that was seen as rather dovish because through the course of the last couple of weeks, we saw two stronger-than-expected inflation surprises. So that really spoke to a central bank which was looking through some of these inflation surprises and very much supportive of a lower interest rate trajectory from here.

So that was seen as rather dovish. The Bank of England similarly did keep rates held unchanged. But what was crucial is that we had a three-way split last time around. In last week's event, we saw eight of the NPC members vote for no change and one voting for a rate cut. So again, the direction of travel is that interest rates will be cut through the course of this year and the markets are again pricing in three rate cuts by the Bank of England. On the other hand, we had the Bank of Japan who.

Erica Whyte:

Yeah, what's happened with the bank of Japan?

Abbas Owainati:

It's it's quite incredible when we when we mentioned this but essentially Bank of Japan increased interest rates for the very first time in 17 years and stop this you know negative interest rates environment that they've been supporting for some time. They've also ended their promise of yield curve control whereby they essentially by Japanese government bonds when yields rise quite markedly. They did however, say that they will continue to purchase Japanese government bonds if there were any material spikes. And the direction of travel in Japan, of course, is that they now finally anticipate that they will see some reflation. So some inflation retaining, which does warrant more normal interest rates.

Erica Whyte:

So Abbas what are the impacts of all these moves here?

Abbas Owainati:

So on the back of last week's central bank meetings, we saw bond yields decline across the board, very much in anticipation of interest rates declines later this year and the equity markets reached a new all time high once again.

Erica Whyte:

I feel like every single week we're facing a new all time high. What do you make of it?

Abbas Owainati:

It's a it's a very good question. It's the million-dollar question. I think we are seeing equity markets reacting to a couple of positive elements, not least soft landing. We've seen very resilient growth in the US and elsewhere, which is supportive of a soft landing. So that's taken as a positive. And similarly, we are seeing inflation, broadly speaking, normalizing, which again is allowing for central banks to start cutting rates, which again is welcome.

And then there is this whole theme, which is which is creating a bit of a tailwind for markets in the sense that this is obviously contributed quite a bit. But is there some complacency in markets perhaps? So. I think there's been a lot of exuberance in a very little in a very short period of time, and I think that can create some challenges going forward.

Erica Whyte:

So looking ahead, what could all this mean? And I know that you don't have a crystal ball. You cannot see into the future.

Abbas Owainati:

Essentially, markets are pricing in as many as three rate cuts by the Fed, the Bank of England and the ECB through the course of this year. June is the most likely timeline when we see the first of those rate cuts. And it happens to be that the European Central Bank sits first in the month of June, anticipate to see a rate cut there.

I think where we need to be a bit more cautious is that if we do see any inflationary surprise, this could potentially impact some of that, you know, forward guidance that has been projected so far. And just put things in context, whilst UK inflation has continued to normalize to around three and a half percent. Services inflation in the UK remains at 6.1%, which is not consistent with a very low interest rate environment. So whilst we might indeed see interest rates decline from here, the real question of the real debate is how far can they go?

Erica Whyte:

Abbass thank you so much for all your expertise here today. That was fabulous.

Abbas Owainati:

Thank you very much.

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The Bank of England held interest rates at 5.25% for the fifth consecutive time

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