RMA: BoE remains in a tough spot as it navigates inflation
14 October 2022 RMA Conference 2022
Image: Shutterstock
The first panel of the day brought together experts to share their thoughts on the global macro environment and the risk this brings to the securities finance industry.
Starting off by reviewing the outlook of inflation, a panellist had suggested that we are beginning to see a slow deceleration. Over the course of the coming years, inflation will move downward but at an insufficiently slow pace.
Taking a general view of the market, one panellist indicated that the Bank of England (BoE) is in a tough spot as it tries to address the inflation situation, in addition to UK pension funds and Liability Driven Investment (LDI) margin calls.
The panellist continued to explain that — similar to the Fed in the US — when a central bank attempts to intervene to address market dysfunction, it is a trial and error process, and so can lead to a period of panic for the market.
From a fundamental standpoint, a panellist highlighted that gilt yields have moved up. However, gilt yields are not at levels that seem fundamentally “out of whack” with some firms’ expectations for supply going forward, given the fiscal expansion there.
A pain point to focus on in regards to gilt yields that was named problematic, is the speed of the move rather than the outright level of gilt yields.
In terms of the BoE, there are differing expectations regarding the hiking of interest rates and how far the bank will go. In the UK, the majority of the market is anticipating their bank rates to rise close to 6 per cent, according to one panellist.
The rise in the bank interest rates will have a significant impact on household disposable income in the UK, suggested one panellist. They continued to warn the audience that the UK will face a recession, even with additional fiscal support.
Reviewing how the situation in the UK will impact the US market, the panel heard that there is pressure on other asset classes as pension funds are being forced to liquidate to meet margin calls. There are impacts on asset prices that will filter through the global economy emanating out of the UK.
Starting off by reviewing the outlook of inflation, a panellist had suggested that we are beginning to see a slow deceleration. Over the course of the coming years, inflation will move downward but at an insufficiently slow pace.
Taking a general view of the market, one panellist indicated that the Bank of England (BoE) is in a tough spot as it tries to address the inflation situation, in addition to UK pension funds and Liability Driven Investment (LDI) margin calls.
The panellist continued to explain that — similar to the Fed in the US — when a central bank attempts to intervene to address market dysfunction, it is a trial and error process, and so can lead to a period of panic for the market.
From a fundamental standpoint, a panellist highlighted that gilt yields have moved up. However, gilt yields are not at levels that seem fundamentally “out of whack” with some firms’ expectations for supply going forward, given the fiscal expansion there.
A pain point to focus on in regards to gilt yields that was named problematic, is the speed of the move rather than the outright level of gilt yields.
In terms of the BoE, there are differing expectations regarding the hiking of interest rates and how far the bank will go. In the UK, the majority of the market is anticipating their bank rates to rise close to 6 per cent, according to one panellist.
The rise in the bank interest rates will have a significant impact on household disposable income in the UK, suggested one panellist. They continued to warn the audience that the UK will face a recession, even with additional fiscal support.
Reviewing how the situation in the UK will impact the US market, the panel heard that there is pressure on other asset classes as pension funds are being forced to liquidate to meet margin calls. There are impacts on asset prices that will filter through the global economy emanating out of the UK.
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