- Sterling drops by 1.9% as investors assess the stark warning from the Bank of England that a recession could last two years.
- Policymakers voted for another 0.75% hike amid worries about stubborn inflation – the biggest rise in 33 years
- Unemployment rate could peak at around 6.5% according to Bank’s forecasts
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’It’s proved to be yet another dismal day for the pound as forecasts of a long recession cast a dark shadow over the UK economy. Sterling dropped by 1.9%, to just $1.116, its lowest level for two weeks, before recovering slightly. Investors have been assessing the bleaker outlook for Britain amid forecasts unemployment could shoot up to just shy of 6.5% by 2025. The pound has been sideswiped yet again by expectations the Federal Reserve will be ahead of the curve on rate rises, with chair Jerome Powell warning that interest rates are set to linger for longer. Although the Governor of the Bank of England, Andrew Bailey, indicated the Old Lady was not yet for turning on rate rises, he said the peak will be lower than market expectations which this morning we currently hovering around 4.6% for June 2023.
After opening sharply lower, the sell-off accelerated on the domestically focused FTSE 250 as the harsh reality about the impact of a squeeze on discretionary spending became clear. Bootmaker Dr Martens and shopping centre owner Hammerson, card retailer Moonpig and Trixtax EuroBox which services e-commerce operations, were among the biggest fallers. With borrowing costs ramping up again, consumers will be looking long and hard about where they can cut costs to keep paying for their mortgage or rent as other cost-of-living pressures also mount.
The FTSE 100, stuffed full of multinationals which benefit when the pound is weaker, rose slightly off the back of falls in sterling, but Rolls Royce dipped back, with investors mindful of its hefty debt load. Even those companies saddled with debts but currently benefitting from fixed interest costs are likely to be more conservative in ploughing money into investments which ordinarily would help spur growth.
There is clearly concern around the table at the Bank about the effect on the economy and the deflationary impacts of recession with two members voting for smaller rate hikes, of 0.25 and 0.5%. The economy is forecast to contract by 0.75% in the second half of 2022, as a result of the severe cost-of-living squeeze, with output expected to continue to fall until early in 2024. In just two years’ time we could have swung from worries about the risk of an out-of-control price spiral to potential worries about deflation, with inflation expected to briefly dip below the 2% target in 2024.
The stage is now set for a fresh political debate about fiscal policy, and whether expected spending cuts are simply the wrong medicine for an ailing economy.’’
