What do these interest rate moves mean to my business?
Below, briefly, we try to address some of the most frequently asked questions of the week:
1. What happened last night, and what is happening later today?
Last night the US Federal Reserve did NOT raise interest rates and released a statement regarding what it will do in the future. Later this afternoon, the European Central Bank will announce its decision on interest rates and hold a press conference.
2. If the US didn't raise interest rates, why didn't the USD$ weaken?
The US Fed has 'paused' (or 'skipped') a rate increase this month, but indicated very clearly that there are 2 more 0.25% increases coming in the medium term, which has kept the USD strong.
3. What is the ECB doing today and how will the EURO move?
The market expects a 0.25% European rate increase today - which is already reflected in where the €€ is trading. Recent data has been mixed - both for and against future rate increases (the market currently expects either 2 or 3 0.25% rate increases in 2023). The Press Conference will be important - President Lagarde has been very vocal in support of continued rate increases to battle inflation - if her tone changes and becomes less aggressive, the EURO may weaken. We will have to wait and see ........... (unless someone can lend us their crystal ball).
4. Will the Bank of England continue to raise rates and will GBP strengthen?
The Bank of England meets next Thursday and is VERY likely to raise rates due to recent economic data which points to increasing factors pushing UK inflation higher. This expectation is already reflected in GBP strength (it is at multi-month highs vs USD and EUR).
The market expects approx. 1.25% to be added to UK interest rates during 2023 which is far more than the US and Eurozone, which is why GBP is strong. Increasing rates will eventually take its toll on the economy which is led by the services and consumer sectors. Eventually the Bank of England has to manage DECREASING rates which is notoriously tricky.