BoE Governor: Expect 13%+ Inflation and a Recession!

The key update of the week is that the Bank of England has increased its interest rate by 0.5%, the largest increase since the Bank’s operational independence in 1997. 

The rate rise comes on the back of a dismal economic forecast by the BoE that forecasted inflation rates of 13% by the end of the year. Inflation is now not expected to return to the 2% target until 2024, with Governor Andrew Bailey placing the blame clearly on the war in Ukraine. 

Household income is predicted to fall by more than 5% throughout 2022 and 2023, the largest fall since records began in 1960, and more than 5 million households will have their savings eroded by 2024. GDP is predicted to decline by 2.1% with the economy due to shrink for five consecutive quarters as fears of stagflation continue to rumble. The BoE is now therefore predicting a recession.

The Bank of England is under increasing pressure to tackle inflation as Tory leadership favourite Liz Truss announced plans to review the Bank’s mandate, potentially altering the independence of the monetary authority. 

Sterling was down 0.6% against the euro at €1.1876 but up against the dollar at $1.217 after the rate announcement.

The BoE wasn’t the only bank to raise rates this week as the Reserve Bank of Australia also hiked by 50 basis points, following action last week from the Federal Reserve and ECB. Both rises were in line with market predictions. 

In emerging markets, investor withdrawals have hit a new high of $38 bn in outflows during the last five months as the strength of the US dollar leaves many countries with devaluing currencies and rising borrowing costs. As fears of global recession mount, inflation is roaring towards 90% in Argentina and 80% in Turkey.

In Argentina, the situation is particularly dire with the peso rapidly devaluing and US dollars being sold on the local black market for 150% of the official controlled exchange rate. This is another economic crisis for the South American state that is struggling with only $2.4 bn in foreign exchange reserves and a $44 bn debt to the IMF that has just been restructured. Sergio Massa has been appointed the new economic minister, the third in under a month, and has pledged to stop the monetary deficits that have caused inflation.

In Europe, energy prices have continued to rise as the IMF has urged the EU to pass costs to consumers to encourage energy saving and reduce fossil fuel dependence. The IMF is advocating for less government protection for consumers, particularly given forecasts of elevated energy prices for years to come. 

In Germany, retail sales fell by 8.8% year-on-year for June which is the largest drop since records began in 1994. The dismal figures followed last week’s data showing the stagnation of the German economy as the Eurozone’s powerhouse slows down. PMI data was weak in Germany along with the rest of the EU demonstrating a contraction in manufacturing activity, another indicator of looming recession.

Ukraine’s first grain shipment arrived in Turkey on Monday after last week’s deal with Russia came into effect. Unfortunately, Ukrainian officials have warned that it will take months for shipments to return to pre-war levels as there is still unease over the scheme. Nonetheless, global grain prices have fallen closer to their pre-war levels as concerns over food security are temporarily abated, although global food inflation shows limited signs of slowing down.

The yen surged to a two-month high against the dollar as investors with leveraged short positions took new inflation, recession and volatility information into account. The currency opened Tuesday at ¥130.5 against the dollar before returning to ¥133 by the time of writing. Changing opinions on the actions of the Fed have resulted in investors reconsidering their positions and coupled with light trading volume over the summer, moves in the currency have been more pronounced. The yen will trade heavily on US inflation data next week but is currently expected to remain weak initially going into the Autumn.

After another gloomy news week, here’s a bizarre story to take your mind off it for a short second. A 3 metre piece of space junk recently landed on a sheep farm in Australia and has now been identified as belonging to a SpaceX ship. The item described as an ‘alien obelisk’ was analysed by the Australian Space Agency amid growing concerns about the quantity of space junk in Earth’s orbit.

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