Market Update – 21st June 2023.

22nd June 2023

In a further effort to pick up what is thought to be cooling economic momentum, the world’s second largest economy, China, saw two more key lending rates cut on Tuesday: the one-year loan prime rate and the five-year loan prime rate.

The one-year loan prime rate was trimmed by 10 basis points from 3.65% to 3.55% and the five-year loan prime rate followed suit, being cut by a further 10 basis points from 4.3% to 4.2%.

So, what might this mean for their current economic outlook? Well, as most of the country’s corporate lending and mortgages are linked to these rates, this tool for monetary easing could go some way to ramping up the overall pace of economic growth. Lower mortgage rates, for example, could perhaps provide support for homeowners and bolster consumer spending, further pushing the economy out of its post-Covid slumber.

Some analysts are saying that while the move is not great enough to make a significant difference to monetary conditions, it is a sign of bigger, more forceful acts of stimulus to come. Changes to policy rates, they claim, are often used in part to indicate that other adjustments to things like bank loan quotas and reserve requirements are just around the corner.

Meanwhile, those who hoped for a slowdown in UK inflation will have been disappointed this morning. The Office for National Statistics (ONS) revealed that the CPI figure for May has remained the same as April, coming in at 8.7% (greater than expectations of 8.4%). The rate continued to surpass the Bank of England’s (BoE) desired 2.0% target, raising worries about its persistence, and creating added pressure for policymakers to sustain the ongoing tightening efforts of the bank.

Such a move, or rather lack of, will be closely watched by the BoE ahead of their meeting to discuss interest rates this Thursday. As the BoE have been rolling out a host of measures to cool inflation over the past few months, the latest figure most likely indicates that another interest rate rise is on the horizon.

Rising costs in the UK may be accompanied by an additional Brexit surcharge, adding to the financial burden for households and businesses. According to the ONS, rising prices for “air travel, recreational, cultural goods & services” helped keep prices higher.

Looking to the week ahead, we have Fed Chair Jay Powell’s Testimony, as always investors will be looking for clues on future monetary policy. We also have the BoE’s latest decision on base rates, US Manufacturing and Services PMI, and UK retail sales.

Nicola Tune, Portfolio Specialist