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When will the big interest rate rises end?

Latest investment update

Published: November 2022

Those rate rises just keep on coming. Both the Bank of England and the US Federal Reserve (Fed) raised interest rates again recently. And both by a chunky 0.75%.

They’re doing it to try to rein in rising inflation. So it’s interesting that we saw a bit of a turnaround in the market’s mood on rising prices in the US last month.

When the latest US annual inflation number came out in October, it was higher than expected (8.2%). But although the country’s stock markets initially swooned, they soon recovered and actually ended the month pretty strongly.

Lilian Chovin, Head of Asset Allocation at Coutts – the bank behind the NatWest Invest funds – explains why.

“The market believes the Fed is going to ease the pace at which it raises interest rates,” he says. “It can’t keep hiking them by 0.75% forever. Whichever way you look at it, economic growth is slowing in the US, which should naturally start bringing down how much people spend as we move into next year.

“This in turn should start easing inflation and mean less need for big rate hikes, at least in America. But that’s important because of the huge influence the country has on global markets.”

Spotlight: Sunak’s big challenge

Rishi Sunak’s appointment as Prime Minister should help restore some credibility back to the UK and see its government and central bank pull in the same direction – both good for investors.

Sunak has big challenges ahead of him though. He needs to cut public spending by around £30-£40 billion a year to help close the country’s budget deficit, which is around £70 billion according to the Office for Budget Responsibility. And however he does it will probably be unpopular amid a cost of living crisis.

More broadly, the UK outlook for 2023 remains difficult given spending cuts, a likely recession and elevated inflation. Coutts saw challenges ahead for the UK economy earlier this year and reduced their exposure to parts of the UK stock market most at risk, and UK government bonds. 

Managing your money

The team at Coutts made two changes within the NatWest Invest funds over the past month to reflect current conditions. They:

  •  invested more in US government bonds given higher yields.
  • reduced their allocation to Japanese government bonds because of interest rate  uncertainty in the country which could hurt their performance. 

Previous updates

Late September 2022

Early September 2022

August 2022

June 2022

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