23 Mar 2023
Surprise events that led to the recent bank failures in no way mirror the 2008 financial crisis, yet concern remains about whether any contagion could spread to other banks. So, against this backdrop of financial instability, the US Federal Reserve had a 'needle to thread' yesterday when it raised interest rates by 0.25% as inflation remains firmly in the spotlight. Though falling, inflation is stickier than the Fed had originally hoped for, making for increasingly complicated decisions.
The Bank of England followed suit today and increased interest rates from 4% to 4.25% - the 11th consecutive rise. An unexpected increase in the rate of inflation in the UK from 10.1% (previous month) to 10.4% was revealed yesterday and, coupled with the move by the Fed, means any mooted tactic of pausing UK rate rises is no longer an option. The US Fed did indicate, however, that future rate hikes are coming to an end, and here in the UK, there remains a widespread belief that any rises may settle at 4.5% by the middle of the year. The good news is that this is lower than initial predictions following Liz Truss's mini budget, highlighting the Bank's eagerness not to dampen the economy, which has shown little sign of growth.
Volatility could continue, and major financial shocks such as those recently played out make it harder for the US to avoid a recession. Maintaining a diversified portfolio and avoiding knee jerk reactions based on day-to-day volatility is key. It's impossible to know the top or the bottom of markets and equally impossible to time entry or exit from the market. History shows us that those who stay invested over the long run generally do better than those who try to profit from market turning points.
