AJ Bell press comment – 3 November 2022
- Bank of England confirms eighth rate hike of this cycle
- 302nd rate hike by central banks globally this year (against just 13 cuts)
- Stock and bond markets continue to hope for a pause or pivot in policy drive to tighten
“Australia, Albania, Armenia and the USA have already taken the plunge this month so the Bank of England’s latest interest rate hike is the fifth by a central bank in November and the 302nd so far this year,” says AJ Bell investment director Russ Mould. “That figure nearly exceeds the total number of hikes between 2016 and 2021 combined and dwarfs the 13 rate cuts served up by central banks in 2022, where Russia, Turkey and China are among the few to be going against the tide of tighter monetary policy.
Source: www.cbrates.com
“The pace has picked up in the second half of 2022, as well, to leave equity and bond investors starting at a streak of sixteen straight months of at least ten hikes – September’s total of 41 is the highest so far.
Source: www.cbrates.com
“This frenzy of activity leaves central banks open to accusations that they are now playing catch up, having been slow to react and initially formed the view that inflation would be ‘transitory,’ at least in the West – many emerging market central banks were much more proactive, notably Brazil, Hungary, the Czech Republic, Chile and Peru.
“It also leaves investors gasping for breath.
“Rising interest rates have left holders of Government bonds terribly exposed, as bond yields have risen, and prices fallen.
“For example, over the past 12 months, the yield on the benchmark UK ten-year Gilt has soared from 1.04% to 3.40% (since who would want to be caught holding paper with a yield of 1.04% when the Bank of England base rate now easily exceeds that, and markets are pricing in a peak in headline borrowing costs of nearer 5%?).
“That equates to an 18% fall in the price of the bond – a total wipe-out for anyone who had thought holding a 10-year Gilt to earn 1.04% was a good idea, which it was never going to be, if inflation ever reared its head (and, lo and behold, it has).
“Rising interest rates are a brake on stock markets too. Just as weight stops trains (and thoroughbred horses), rising rates stop stock markets, because investors start to take the easy option of banking 4% to 5% a year from bonds or rates on cash in the bank, rather than take the capital risk associated with shares (although inflation remains a complicating factor here).
“This is why bond and share investors all have the prayer mat out as they hope for a central bank ‘pause’ or ‘pivot,’ and a move to slower rate hikes, followed by no rate hikes and finally a fresh round of cuts.
“Once markets have a good sense of where rates could peak, it is easier for investors to do the maths and assess the relative attractions of cash, bonds and shares on a valuation basis. The killer at the moment is no-one knows where interest rates could peak – not even central bankers, it appears, as they seem unsure as to whether the fight against inflation is being won or not.”
