Old Lady of Threadneedle Street Calls It A Recession

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What's going on?

The Bank of England (BoE) hoisted interest rates to a 14-year high of 2.25% and warned of more forceful action ahead.

What does this mean?

On the coattails of the Federal Reserve (the Fed)’s 0.75 percentage point rise on Wednesday, the BoE whacked up its interest rates by half a point. But it didnt stop there: the BoE also announced plans to start selling the government bonds its accumulated over the last 14 years, in a move thatll drain money from the financial system. This comes against a backdrop that was already pretty gloomy: Bank officials have lowered this quarters growth projections, predicting economic activity will shrink for the second quarter in a row. That, ladies and gentlemen, would be a technical recession.

Why should I care?

Zooming out: UK housing cant defy gravity forever.
The UKs housing markets been flying pretty close to the sun, and it looks like its about to get burnt. The fact that most UK borrowers are on fixed-rate mortgage deals is delaying the pain, but every rate rise is like another tequila after midnight brewing one almighty hangover thatll hit with full force when refinancing time comes. Expect borrowing, home buying, and prices all to take a hit.

For markets: Is sterling a one-way bet?
The euros already arrived at the US dollar parity party, and it looks like sterlings en route but fashionably late. This isnt just a reflection of differing interest rates: the US is a safe harbor in stormy seas, which prompts investors to anchor their cash in dollars and dollar-based assets further boosting the greenback. For sterling to steer clear of parity, either the BoE has to get more heavy-handed than the Fed or the UK economy needs to miraculously emerge from its current economic quagmire. Neither, to be frank, seems likely.

Originally posted as part of the Finimize daily email.

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