Treasury Market Commentary –

Will rate increases push the UK into recession later this year?

A weekly economic update from our Treasury team.

Published

5th August 2022

Category

Macro Commentary

The Bank of England raised interest rates by 0.50% this week, the largest hike since in 27 years, to take the Bank rate to 1.75%. The vote was split 8-1. Markets are forecasting rates to peak at 2.75% early next year as the Bank remains committed to bringing down surging inflation. The concern is these rate increases may in fact push the economy into recession this year. Rate cuts will then be required later next year to stimulate growth.

There are some indications that the UK housing market is beginning to cool, with the pressure of rising interest rates and the surging cost of living starting to have an effect. Next week’s focus will be the UK GDP data to see how the economy performed in the second quarter.

In the US, the Fed are likely to continue their path of aggressive policy tightening, though the pace and size of hikes is now expected to moderate. 

The European central bank is also fully expected to hike further in the coming months as they continue to move away from negative interest rates, despite the challenging economic outlook, being driven by ongoing concerns over gas supply.

Geopolitical risks are growing once again with tensions rising over the future relationship between the US, China, and Tawain, with concerns on implications this may have on the global economy.

On the exchanges, sterling has held onto its recent gains, trading around 1.2200 versus the dollar, following its dramatic recovery from the 2-year lows since just a few weeks ago. GBP/EUR has held above 1.1800 but is so far lacking the momentum to challenge the psychological 1.2000 level.

GBP/EUR – 1-year chart

Week Ahead

Date

Release

Last

Expected*

12/8/22

UK GDP QoQ

0.8%

-0.1%

12/8/22

UK GDP YoY

8.7%

3.0%

12/8/22

UK Industrial Prod. YoY

1.4%

1.3%

12/8/22

UK Manufacturing Prod. YoY

2.3%

n/a

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.2155

USD/JPY

133.35

GBP/EUR

1.1885

AUD/USD

0.6965

EUR/USD

1.0230

USD/CHF

0.9570

GBP/AED

4.4680

XAU/USD

1791

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7451

0.91%

S&P

4151

-12.89%

EUROSTOXX

3751

-12.99%

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+2.69%

5-year

+2.33%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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