Investment Institute
Weekly Market Update

Take Two: BoE intervenes after sterling hits record low, Eurozone inflation hits record

  • 03 October 2022 (3 min read)

What do you need to know?

The Bank of England (BoE) said it would buy UK government debt – known as gilts – to address a dramatic market reaction to Chancellor Kwasi Kwarteng’s announced fiscal plans. Proposed unfunded tax cuts had seen sterling hit a record low against the US dollar before rallying, while UK interest rate expectations moved sharply higher and 30-year gilt yields reached more than 5%, the highest since 2002. Yields moved back below 4% after the BoE intervened, saying it would buy long-dated gilts “on whatever scale is necessary” – strictly until 14 October. The tax plans were widely criticised, including by the International Monetary Fund. UK second quarter (Q2) GDP growth was revised to 0.2% from -0.1%, and the current account deficit fell to 5.5% of GDP from Q1’s downward revised 7.2% (from 8.3%).

Around the world

Eurozone year-on-year inflation hit a record 10% in September, ahead of expectations and up from 9.1% in August. Inflation in Germany was at levels not seen in 70 years and expectations increased for a significant rate hike from the European Central Bank (ECB). Against this backdrop, the European Commission’s economic sentiment index fell more sharply than expected. Earlier in the week, ECB President Christine Lagarde reiterated the bank would continue to raise interest rates even though economic activity was expected to “slow substantially”. She also said fiscal interventions from national governments had been too broad rather than tailored for those most in need.

Figure in focus: 2.8%

China’s economic growth is expected to lag the East Asia and Pacific region this year for the first time since 1990, according to the World Bank. Citing COVID-19 outbreaks and difficulties in the real estate sector, it cut its 2022 GDP growth forecast to 2.8% from 5% predicted in April – down from 8.1% reported for 2021. There was a mixed picture from China manufacturing activity with the official Purchasing Managers’ Index (PMI) back in positive territory at 50.1 for September from 49.4 in August, while the private Caixin PMI showed a decline to 48.1 from 49.5.

Words of wisdom:

Climate Smart Agriculture (CSA): An approach to agriculture which integrates green and climate-resilient practices to address challenges of food security, development and climate change. CSA aims to transform agri-food systems by enhancing productivity, minimising climate-related risks and reducing sectoral emissions. Last week, US President Joe Biden’s administration announced $2.8bn in financing for a pilot programme of 70 projects that will incentivise the adoption of these farming techniques, as part of efforts to make the country’s agriculture sector more sustainable.

What’s coming up

On Monday, the Bank of Japan publishes its Summary of Opinions – its economic outlook – from its September meeting. The Reserve Bank of Australia, after raising its cash rate by 50 basis points to 2.35% in September, convenes for its October monetary policy meeting on Tuesday. Wednesday sees final PMIs covering September, for the US, UK and the Eurozone. On Thursday, India’s PMIs are published and on Friday the latest US jobs numbers are announced.

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