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BoE Risks Long-term Growth With Multiple Rate Hike Expectations

Northern Trust Asset Management Monthly Market Commentary for September 2021 - Exclusive Insight for TMI Subscribers

Eurozone Market Update

At September's monetary policy meeting, the European Central Bank (ECB) unanimously voted to leave interest rates and forward guidance unchanged. They also recalibrated the purchases in the Pandemic Emergency Purchasing Programme to a “moderately reduced pace” in the fourth quarter relative to the prior two quarters. There was no change in forward guidance on the Asset Purchase Programme, with which the Bank still plans to continue making net purchases until “shortly before it starts raising … interest rates”. The ECB remains dovish relative to the Federal Reserve and Bank of England (BoE). The ECB’s inflation outlook in 2023 at 1.5% and five-year/five-year swap rate at 1.75% indicates loose monetary policy continuing beyond the expiration of programmes in 2022. 

UK Market Update

This month, the BoE’s Monetary Policy Committee unanimously agreed to keep the base rate unchanged and voted 7-2 to maintain the quantitative easing (QE) programme. Comments on inflation were somewhat hawkish, as the BoE expects it will go above 4% and remain there into Q2 2022 before falling back to 2% in 2023. The market viewed the minutes as hawkish, moving forward pricing for rate hikes. The first 15bps hike is now priced in for March 2022, with an additional 25bps hike for September 2022 to take the base rate to 0.50% (see Chart of the Month). Issuer levels echoed this movement higher, with the six-month issuance rates up 4bps and the one-year rate up 8bps. Despite this, general investor activity remained subdued due to quarter end constraints.

US Market Update

The Federal Open Market Committee's monetary policy was unchanged in September, but it strongly hinted a QE taper will be announced in November. The Fed’s dot plot showed 50% of the members expect at least one hike by the end of 2022, with the median rate projection at 1% at the end of 2023 and 1.75% by the end of 2024. The timing and speed of the taper was more hawkish than the market had expected, which moved up expectations for the first rate hike to early 2023. This has led to a selloff in Treasuries and a significant increase in volume placed at the Fed’s overnight reverse repo facility, which hit an all-time high of $1.6 trillion on September 30.