Week 12 | March 20 – 24, 2023
Mr. Van Loven A. Abbu, LPT
SUMMARY
United States (USD) Highlights:
Fed Raises Rates to 4.75%-5%, Inflation Remains a Concern:
The Federal Reserve raised the fed funds rate by 25 basis points to 4.75%-5% in March 2023, for the second time this year, in response to persistent inflationary pressures. This move brought borrowing costs to their highest level since 2007. While the decision was anticipated by most investors, some believed that the central bank should pause the tightening cycle to promote financial stability. However, the Fed noted that the US banking system is sound and resilient, and that recent developments are likely to result in tighter credit conditions for households and businesses, which could impact economic activity, hiring, and inflation.Looking ahead, the fed funds rate is projected to reach 5.1% this year, the same as the December projection, and end 2024 slightly higher at 4.3%. In contrast, the rate is expected to fall to 3.1% in 2025, consistent with the projections from December. The Fed raised its PCE inflation forecasts for this year to 3.3%, up from 3.1%, while keeping them steady at 2.5% for 2024. The economy is projected to grow slightly less in 2023, at 0.4% compared to the previous estimate of 0.5%, and in 2024, at 1.2% compared to the previous estimate of 1.6%.
The Fed’s decision to raise the fed funds rate is an attempt to manage inflation, which has been a persistent problem in the US economy. While higher interest rates can help reduce inflationary pressures, they can also make borrowing more expensive for households and businesses, potentially slowing economic growth. The decision to continue tightening monetary policy is based on the Fed’s outlook for the economy, which remains strong but faces challenges from supply chain disruptions and rising prices.
Source: Federal Reserve
United Kingdom (GBP) Highlights:
UK Inflation Surges Unexpectedly to 10.4% in February:
UK’s annual inflation rate unexpectedly rose to 10.4% in February 2023 from 10.1% in January, the first increase in four months and exceeding forecasts of 9.9%. The surge was driven by the cost of food and non-alcoholic beverages, which rose by 18%, the highest level since August 1977. This was mainly due to a shortage of salad produce and other vegetables due to bad weather in southern Europe and Africa and the impact of higher electricity prices. Restaurants and hotels also saw a substantial increase of 12.1%, primarily due to the cost of alcohol served in restaurants, cafes, and pubs. Clothing and footwear prices rose by 8.1%, and health prices increased by 6.8%. However, prices for transport, furniture, housing and utilities, and recreation and culture experienced a slowdown.
The rise in inflation is likely to put pressure on the Bank of England to increase interest rates to control prices. The Bank of England’s inflation target is 2%, and the latest figures have exceeded that by a significant margin. If the bank increases interest rates, it could lead to higher borrowing costs for households and businesses. This could potentially slow down economic growth and lead to job losses. The Bank of England has previously stated that it expects inflation to remain high for some time, and this latest increase reinforces that view. The impact on consumers’ spending power is likely to be significant, and it could lead to changes in consumption patterns as households adjust to the higher prices.
Source: Office for National Statistics
Bank of England Raises Key Rate to 4.25% Amid Inflation Concerns:
The Bank of England has announced a 25bps increase in the key bank rate to 4.25% during its March 2023 meeting. This move was in line with market expectations and aims to bring inflation back to the 2% target. However, inflation in the UK unexpectedly rose to 10.4% in February 2023 from 10.1% in January. Despite this, policymakers believe inflation is still likely to fall sharply over the rest of the year, though further tightening may be required if there is evidence of more persistent pressures.The recent banking crisis was also addressed during the meeting, with the Bank of England noting that the UK banking system maintains a robust capital and strong liquidity position, remaining resilient. The bank will continue to closely monitor any impact on credit conditions for households and businesses, as well as the macroeconomic and inflation outlook.
According to the Office for National Statistics, the increase in inflation was driven by higher costs of food and non-alcoholic beverages, as well as restaurants and hotels. The bad weather in southern Europe and Africa led to shortages of salad produce and other vegetables, resulting in higher vegetable prices. The upward pressure on restaurants and hotels came mainly from alcohol served in these establishments. The rise in inflation is also attributed to the impact of higher electricity prices, clothing and footwear, and health. Meanwhile, there was a slowdown in prices for transport, furniture, housing and utilities, and recreation and culture.
Source: Bank of England
UK Consumer Confidence at Year-High of -36 Amid Economic Forecasts:
The GfK Consumer Confidence indicator in the UK rose to -36 in March 2023 from -38 in February, indicating that confidence is recovering after a prolonged period of uncertainty. The latest figure matches market expectations and is the highest reading in a year amid better economic forecasts. However, despite the uptick, consumer confidence remains fragile, with weak sentiment over personal finances continuing to weigh heavily. This is due to wages not keeping up with rising prices, and the cost of living crisis remaining a stark reality for most. The soaring energy and food prices, as well as higher interest rates, have added to the factors squeezing household budgets.
According to GfK, the overall improvement in consumer confidence masks “continuing concerns among consumers about their personal financial situation.” Joe Staton, client strategy director at GfK, highlights the need for caution and the potential for further economic shocks. With UK inflation rising unexpectedly to 10.4% in February, the Bank of England raised interest rates by 25 basis points, indicating policymakers’ efforts to keep inflation under control. While the move may provide some relief for savers, borrowers will face higher costs, including mortgages and loans. As such, it may further dent consumer confidence in the coming months, which policymakers will need to monitor closely.
Source: GfK Group
Canada (CAD) Highlights:
Canada’s Annual Inflation Rate Falls to 5.2% in February 2023:
Canada’s annual inflation rate declined to 5.2% in February 2023, the least since January 2022, and below market expectations of 5.4%. The rate of inflation slowed from 5.9% in the previous month due to significant base-year effects. The slower growth in price was evident in the transportation sector, where the increase was 3.1%, compared to 5.4% in January. This decrease was attributed to an elevated base-year comparison and a slowing economy that drove energy costs down by 0.6%, compared to a 5.4% increase in January.
Similarly, inflation slowed for shelter, with a growth rate of 6.1% versus 6.6% in January. This decrease was due to slower homeowners’ replacement costs, which increased by 3.3%, offsetting the increase in mortgage costs (23.9% vs. 21.1%) amid the Bank of Canada’s monetary tightening campaign. Meanwhile, food costs remained elevated at 9.7%, versus 10.4% in January, as adverse weather conditions continued to impact food prices.On a monthly basis, the Canadian CPI increased by 0.4%, slowing from the 0.5% increase in the previous month.The slower growth in inflation is a welcome relief for Canadians who have been grappling with high prices for several months. However, the inflation rate is still elevated and remains a concern for the Bank of Canada, which has been implementing monetary tightening measures to curb inflation. The slowdown in transportation and shelter inflation rates may be attributed to the Bank of Canada’s tightening measures. The central bank’s monetary policy is expected to play a crucial role in stabilizing prices in the coming months.The Bank of Canada has been closely monitoring inflationary pressures in the economy and had raised its benchmark interest rate three times in recent months to curb rising inflation. However, with inflation remaining elevated, the bank may have to continue with its monetary tightening campaign to stabilize prices.
Source: Statistics Canada
Japan (JPY) Highlights:
Japan’s Annual Inflation Rate Falls to 3.3%, Lowest Since Sep’22:
Japan’s annual inflation rate decreased to 3.3% in February 2023, a drop from January’s 41-year high of 4.3%. This latest figure is also the lowest print since last September. The decline in inflation is attributed to the increase in the cost of transport, which rose the least in five months at 1.7%, compared to 2.1% in January. Furthermore, the prices of fuel, light, and water charges dropped for the first time since May 2021, with electricity decreasing by 5.5%, and gas dropping by 12.5%.In contrast, inflation remained unchanged for housing at 1.3%, while it increased for clothes (3.6% vs. 3.1%), furniture & household utensils (8.7% vs. 7.7%), medical care (0.9% vs. 0.5%), education (0.9% vs. 0.7%), and miscellaneous items (1.3% vs. 1.1%). However, the cost of food increased the most since September 1980 at 7.5%, compared to 7.3% in January.
Core consumer prices rose 3.1% year on year, matching forecasts but still above the Bank of Japan’s 2% target for the 11th consecutive month. On a monthly basis, consumer prices fell by 0.6% in February, the first decline since October 2021.The decrease in inflation in February may offer relief to Japanese consumers who have been grappling with high prices for months. However, the rising cost of food, along with the continuous inflation in core consumer prices, suggests that the underlying inflationary pressures remain present. These factors could potentially pose a challenge to the Bank of Japan’s monetary policy to keep inflation in check.
The Bank of Japan has been struggling to achieve its 2% inflation target for several years. The recent decrease in inflation could potentially ease the pressure on the Bank of Japan to implement additional monetary policies to curb inflation. Nevertheless, the continuing rise in core consumer prices and the overall volatility in prices indicate the need for continued monitoring of the situation.
Source: Ministry of Internal Affairs & Communications
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