Market Update – 13th October 2021.

Over the weekend Michael Saunders, a BoE policymaker, said that financial markets were right to bring forward expectations on UK interest rate increases.

Although these hawkish comments were seen as a hint that the BoE will start to increase UK interest rates at the next monetary policy meeting (which will be held on Thursday 4th November 2021), it should be noted that Michael Saunders is one of the most hawkish members of the BoE’s monetary policy committee and recently voted for a reduction in the BoE’s QE program.

Whilst following his comments we are left with no doubt that he will vote for an interest rate increase, for the BoE to actually increase interest rates, he will need another four of the nine policymakers to join him – which we think is a tall order.

Although we appreciate that the BoE is concerned that inflation expectations could become unanchored (and thus embedded in our thinking and consumption), with the price of a barrel of Brent above $80, coupled with the recent spike in gas prices, ongoing supply chain disruptions and next year’s tax increases, we don’t believe that the BoE can afford to be too enthusiastic with interest rate increases.

Instead, we believe that policymakers need to be patient and see how the UK economy copes with these issues – as they could easily slow the economic recovery.

Our focus now moves to the US as later today (1:30pm UK time) US CPI inflation data is released, and then at 7pm UK time the minutes of the last policy meeting are released – and we will be looking for comments and clues regarding policymakers’ tolerance for a US inflation overshoot.

Investment Management Team