Yesterday, the US federal reserve increased the Fed Funds target rate by another 0.75% to the targeted 3.75%-4%. This increase was expected and priced in the markets.
Following are the key announcements:
1) “Data since our last meeting suggests that the ultimate level of interest rates will be higher than expected”
2) The rates would top put at a higher “terminal” level, before any further decreases.
3) The pace of the increases may slow.
The conclusions from the announcements are that the higher rates are expected to stay for a long time (potentially years). Of note, the markets had been pricing a possibility of an early “pivot”, i.e., a decrease in rates starting from 2023, which now appears to be a remote event.
Earlier, on the 27th of October, the ECB raised its deposit rate by 0.75% to 1.5%. The commentary was clear: rates will be increased to tame inflation.
Today, on the 3rd of November 2022 the BOE Monetary Policy Meeting is expected to take place. Our expectation is a rise of the Base rate by 0.5%-0.75%.
However, we will be more closely watching the commentary of the BOE in light of the most recent policy announcements of the US Federal Reserve and the ECB.
In case BOE announces a milder approach, we expect significant downward pressures on the GBP vs USD and EUR pairs. We expect that the BOE will generally follow the FED and ECB to avoid GBP devaluation against EUR and USD as it further increases inflationary pressures.
As such, we expect longer periods of high interest rates in the UK with associated downward pressures on asset prices.
Relevance to Jersey: We do not expect interest rates to go down soon, and the significantly increased interest expenses should be priced into the property prices. The buyers should negotiate to ensure noticeable and significant discounts are achieved on property transactions in the environment where the property asking prices have not yet fully reflected the market information.
