Markets
The Bank of England board raised interest rates by 25 bps to 5.25% in a 6-3 split decision. Two members favoured a continuation at the 50 bps clip while one wanted to keep the policy rate unchanged. The BoE acknowledged but downplayed the bigger than expected June CPI decline (to 7.9%). New forecasts based on a policy rate hitting 6% showed inflation still being at 5% by the end of this year and not hitting the 2% target before 2025Q2! The upward inflation revision compared to the May forecast, when a peak policy rate of “only” 4.75% was used, comes as the BoE decided to bring some of the inflation risks effectively into the projection. One of them includes increasing pay gains. Private sector pay growth increased to 7.7% y/y in the three months to May, materially above the May expectations. This follows a still tight labour market, even if some signs of easing begin to emerge. Quarterly GDP growth has been around 0.2% during 2023H1 and a similar growth rate may occur in the near term. Here too, signs of weakness arise, with the BoE specifically mentioning the July PMIs. In terms of further tightening, the BoE retains guidance that more hikes follow in case of more evidence of persistent inflationary pressures. It added a phrase stating that “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.” Hello, higher for longer.
UK money markets still fully discount two more rate hikes over the course of this year/beginning of the next. UK short term rates collapsed 10 bps after the decision as some braced for another 50 bps move before cutting losses in half. The pound loses ground, though the bulk of that move happened in the run-up to the meeting. EUR/GBP tested the 0.865 zone, up from the low 0.86 area. Ahead of the BoE, there was some talk of the central bank stepping up the balance sheet reduction as indicated by the likes of Ramsden. Instead, it only said it would decide over the year ahead amount (Oct 23 – Sep 24) at the September meeting. In other markets, the core bond/UST and equity sell-off continued. US yields extend yesterday’s ascent by adding 3.6 (2-y)-11 (30-y) bps. Fed’s Barkin saw in the June CPI signs of a soft landing, supporting the yield rally at the long end of the curve. Germany adds up to 6 bps. EUR/USD whipsawed around opening levels of 1.094. The Japanese yen outperforms. Economic data today included marginally weaker than expected weekly jobless claims (227k vs 221k), a sharper than anticipated uptick in Q2 nonfarm productivity (3.7% vs 2.2%), causing unit labor costs to rise less than estimated (1.6% vs 2.5%). The US services ISM is scheduled for release after wrapping up this report.
News & Views
Swiss inflation fell in July. The monthly pace turned to a negative -0.1%, making the yearly figure ease from 1.7% to 1.6%. Core inflation dropped 0.2% m/m, falling to 1.7% vs. an unchanged 1.8% analyst estimate. The Swiss Federal Statistics Office said reduced prices for clothing and footwear were among the reasons for the decline. Prices for air transport and international package holidays fell too while prices for supplementary accommodation and the hire of private means of transport increased. Services inflation as a whole eased further, from 1.7% to 1.5%. The headline gauge has been within the central bank’s 0-2% target range for a second month straight now. However, the Swiss National Bank expects price pressures to rebound by the end of the year amid a wave of rent increases. SNB president Jordan said a September rate hike is therefore “most likely” to bring inflation permanently below 2%. EUR/CHF weakens to 0.957 today though that has mainly to do with the general risk aversion.
Turkish disinflation came to a halt in July. Price pressures reaccelerated from 38.21% to 47.83% on a searing 9.49% m/m pace. Core inflation picked up too, from 47.33% to 56.09%. All measures topped expectations. Transportation costs jumped the most as a result from last month’s introduced tax hikes on fuel. The government also raised taxes on several other essential goods as it sought to finance Erdogan’s expensive pre-election pledges including one month of free natural gas. This complemented ongoing weakness in the Turkish lira, fueling inflation further. The Turkish central bank expects the current bout of rising price pressures to end only by mid-2024, project at around 60%. It is currently in the process of gradually lifting the policy rate, having brought it from 8.5% to 17.5% currently. Its next meeting is August 24. The Turkish lira today holds steady at record low levels around EUR/TRY 29.56 and USD/TRY 26.98.
