The week ahead 09 May 2023 - Interest rates rise again in the US and Eurozone
What to watch out for in the UK economy and property market this week.
As was forecast, the US Federal Reserve and the ECB increased their policy rates last week – each by 25 bps. The two major central banks look set now to briefly diverge, as US rates are thought to have reached their peak; however, the ECB has stated it will continue hiking rates. Euro Area core inflation fell slightly in April compared with March, to return to its February level. If, however, core inflation continues to decline in the coming months, pressure will ease on the ECB to take rates higher. For US interest rates, debate now seems to be switching to the question of when will we see the first cut? In fact, Capital Economics is predicting this could happen as soon as September. However, we suspect inflation could remain stickier than the Fed would like, and unless there is a major slowing of the economy, it might be next year before US rates are cut.
Meanwhile, the banking crisis continued with speculation surrounding the future of PacWest, another Californian bank. A profile seems to be emerging of the type of bank that is proving vulnerable – small to medium-sized, a big exposure to the Californian tech sector and a high level of uninsured deposits. Some also have a lot of real estate debts. This is not universally true (Credit Suisse hardly fitted that profile), but this increases the likelihood the crisis should remain limited to a section of the industry, rather than turning systemic. It should also be noted that several major UK banks have reported strong profits lately. Nevertheless, the crisis is keeping financial markets volatile. It is probably also exerting a ‘butterfly effect’ on availability of UK and European real estate debt by dampening sentiment and keeping lenders nervous.
This week sees the Bank of England hold its policy meeting, where it is expected to follow the lead of the Fed and ECB and up rates by another 25 bps. We believe they will subsequently pause for a time and assess the impact on the economy of the hikes so far. This is because it usually takes 12-18 months for rate increases to feed through into the economy, and the Bank will be mindful of the risk of tipping the country into a significant recession further down the line. The UK will also report GDP figures for Q1, which are likely to show the economy avoided a contraction.
Things to watch for this week
Wednesday 10th May
US Inflation, April
Previous: 5.0%
Forecast: 4.9%
With the effects of higher interest rates kicking in, US inflation is expected to edge down. However, the Fed will be concerned that the deceleration in the pace of decline is a sign that inflation is proving to be sticky.
Thursday 11th May
Bank of England Rate Announcement, May
Previous: 4.25%
Forecast: 4.50%
With inflation proving slow to decline, and looking high compared to other major economies, we are forecasting the Bank of England to tighten policy this week.
Friday 12th May
UK GDP, Q1 2023
Previous: 0.1% q-on-q
Forecast: 0.1%
We see Q1 GDP as being broadly similar to that seen in Q4, so flat to growing marginally in the face of high interest rates, elevated inflation and ongoing industrial disputes.
