- The Bank of England raises interest rates by 50 basis points
- BoE expects recession in 2023
- Fed official: The 50 bp increase in September is “reasonable”
- Oil stabilized after hitting a six-month low
- Lufthansa returns to operating profit
LONDON, Aug 4 (Reuters) – Sterling fell on Thursday after the Bank of England followed its peers in the United States and the euro zone with a sharp rise in interest rates to quell inflation, saying Britain was facing a prolonged recession.
As expected, the BoE raised interest rates by 50 basis points to 1.75%, the sixth increase since December but the biggest since 1995.
The UK economy will begin to contract in the last quarter of 2022 and continue to contract next year, making it the longest recession since the global financial crisis, the central bank said. Read more
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“The main surprise seems to be the somewhat dodgy economic forecasts we’ve also been given, which show a recession expected in Q4 and lasting until 2023,” said Stuart Cole, chief macro economist at Equiti Capital.
“This is slightly worse than what we saw in May, where the outlook was for one or two tough quarters of low or negative growth and then a recovery.”
Sterling fell 0.2% to $1.2122 after being slightly firmer ahead of the BoE announcement.
British gilt yields fell sharply, with eurozone bond yields extending their slide after the BoE statement.
S&P 500 futures were firmer ahead of the Wall Street open and the latest jobless claims data, although Friday’s nonfarm payrolls will be watched more closely.
Stocks were broadly firmer on Thursday, helped by strong gains in Europe, while Asian shares recovered some of Wednesday’s losses, led by tensions over Nancy Pelosi’s visit to Taiwan.
The STOXX ( .STOXX ) index of leading European companies rose 0.5 percent, helped by a return to operating profit at German airline Lufthansa ( LHAG.DE ) and strong earnings from commodities giant Glencore ( GLEN.L ). French bank Credit Agricole joined the growing list of better-than-expected bank earnings. Read more
Shares in Hong Kong ( .HSI ) rose 2 percent, tracking broader gains in Asia ( .MIAP00000PUS ), paring some of the losses suffered after friction between China and the U.S. flared over a visit to Taipei this week by the chairman of the House of Representatives Pelosi, which angered China. Read more
Oil prices steadied after hitting six-month lows, while the dollar was supported by U.S. Federal Reserve officials who defied suggestions they would slow the pace of interest rate hikes, with one saying a 50-basis-point increase would be “reasonable”. Read more
A survey by the European Central Bank showed that consumers in the euro area are preparing for a contraction of the economy and for continued high inflation. Read more
STILL NO EARNINGS RESET
Casper Elmgreen, head of equities at asset manager Amundi, said the illusion that decades-high inflation would be temporary had now firmly vanished as fuel bills rose and companies struggled to find staff.
“The big picture here is that it will take a lot of effort to restore price stability. The risk here is that we underestimate how powerful the force is that we’re dealing with,” Elmgreen said.
The second-quarter earnings season, now underway, has not provided a major “reset” to what Elmgreen sees as still too high earnings expectations for 2022 overall, given that the economy is slowing.
“I think that could happen in the third or fourth quarter when we start to see more impact on demand,” Elmgreen said.
Fed officials unleashed a hawkish chorus this week, hammering out the short end of the yield curve. The two-year Treasury yield traded at 3.0938%, slightly lower, while the benchmark 10-year yield traded at 2.7209%, also slightly weaker.
The dollar halted a slide that began in mid-July, supported by both interest rate hike expectations and heightened political tensions.
Federal Reserve funds futures remain priced in for rate cuts that will begin by the middle of next year, and the inversion of the U.S. yield curve, with the 10-year yield below the two-year yield, suggests investors believe the pedestrian path will harm growth.
The dollar index traded at 106.27, down 0.178%. One euro, weighed down by Europe’s energy crisis, bought $1.0188.
Brent crude futures were slightly firmer at $96.82 a barrel as supply concerns sparked a recovery from multi-month lows on Wednesday after US data signaled weak demand for the fuel. Read more
Spot gold rose 0.9% to $1,781 an ounce.
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Reporting by Tom Westbrook in Singapore and Kevin Buckland; Editing by Kim Cohill, Mark Potter and Susan Fenton
Our standards: The Thomson Reuters Trust Principles.
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