Treasury Market Commentary –

Inflation hits 30-year high of 5.4%, how will the Bank of England respond?

A weekly economic update from our Treasury team.

Published

21st January 2022

Category

Macro Commentary

The Bank of England seems increasingly likely to raise interest rates again next month, in what would be the first back-to-back rate rises since 2004. Inflation has surged to a 30-year high of 5.4%, and with wages only rising at 4.2%, the squeeze on the consumer continues, and is set to get worse with the energy price rises expected in April, as well as rising taxes.

The Bank rate rising to 0.50% also opens the door to a gradual reduction of QE, with huge implications for bond markets.

A further easing of restrictions will benefit the economic recovery, and the jobs market continues to be incredibly resilient, with unemployment dropping to 4.1%.

UK long term interest rates continue to push aggressively higher, with the 5-year swap rate close to its 5-year high of 1.32, last seen in 2018.

In the US, the central bank look set to start raising rates in March, with the market ramping up expectations on the speed and level of Fed policy tightening this year.

The European central bank, however, insists that high inflation will be temporary, and they are likely to keep negative interest rates until well into next year.

On the exchanges, volatility remains high, whilst volumes and conviction levels remain low, with sterling demand remaining strong ahead of the Bank of England meeting on February 3rd, and the interest rate outlook continuing to weigh on the Euro.

GBP/EUR is trading above the psychological 1.2000 level, just below last year’s high of 1.2050.

GBP/USD is trading within a new range of 1.3500 – 1.3750.

GBP/EUR – 1-year chart

“”

Week Ahead

Date

Release

Last

Expected*

24/1/22

UK Markit/CIPS Services PMI

53.6

n/a

24/1/22

UK Markit/CIPS Composite PMI

53.6

n/a

24/1/22

UK Markit Manufacturing PMI SA

57.9

n/a

26/1/22

US FOMC Rate Decision (Lower Bound)

0.00%

0.00%

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.3575

USD/JPY

113.90

GBP/EUR

1.1990

AUD/USD

0.7195

EUR/USD

1.1325

USD/CHF

0.9155

GBP/AED

4.9870

XAU/USD

1838

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7580

+2.66%

S&P

4482

-5.95%

EUROSTOXX

4297

-0.02%

UK Benchmark Rates

Libor

 

Swap Mid (SONIA)

 

3 month

0.56130%

2 year

+1.15%

6 month

0.89440%

5 year

+1.23%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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