Week ending 5th November 2021.

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It was a full-on week of monetary policy excitement as we had central bank meetings in the US, UK & Australia, especially given there was a heightened risk that policymaker actions to the recent higher inflation readings could damage the economic recovery.

The Reserve Bank of Australia (RBA) was first up on Tuesday (2 November 2021) and while Philip Lowe, the Reserve Bank Governor, voiced concern about global inflationary pressures, he dismissed speculation that Australian interest rates would rise early next year as a complete overreaction to an inflation increase which is a result of coronavirus restrictions – and as such he said RBA policymakers were in no hurry to increase interest rates.

It was a similar story from the Fed on Wednesday (3 November 2021) as Jay Powell, the Fed chair, also stressed that while longer and more persistent supply-chain disruptions and bottlenecks would lead to higher inflation, the US central bank would be patient with any interest rate increases.

Additionally, and as expected, Fed policymakers announced it would start to taper to their QE program by $15bn a month.

In the UK, while it was a similar story, the BoE’s actions did cause a stir.

While we have been saying in these commentaries that the BoE shouldn’t and wouldn’t increase UK interest rates, financial markets expected policymakers would increase UK interest rates – and thankfully BoE policymakers put our concerns about slowing growth above a transitory spike in inflation and defied market expectations by voting 7-2 to leave interest rates unchanged at 0.1% (although we have to admit that we were taken aback by how wide the voting margin was, as we expected it to be a much tighter call given recent hawkish comments from some of the BoE policymakers).

This suggests to us that while we are currently experiencing higher inflation, central banks have finally realised that much of this inflation is a result of supply chain issues and transportation disruptions – and as we have previously said higher interest rates won’t increase the supply of gas or semiconductors, or increase the wind speed, or move shipping containers in and out of ports quicker.

In fact, we believe that goldilocks conditions are returning (interest rates will remain low even when they do finally start to increase, while the semiconductor shortage is starting to show signs of easing and some commodity prices appear to have topped out), which is positive for global equity markets.

Looking ahead to the week coming we have UK Q3 GDP; UK & Eurozone industrial production; US, Chinese and Japanese PPI; US & Chinese CPI inflation; and the University of Michigan Consumer Sentiment index.

Investment Management Team