5 October 2023

Investors breathe a sigh of relief

Consumer confidence levels are rising in response to strong wage growth and easing inflation, writes Calvin Miles.

by Calvin Miles

Senior Investment Manager

Data during the last week has led investors to breathe a sigh of relief, with the unexpected news that inflation fell in August, not only in terms of headline CPI, but also core inflation which strips out volatile food and energy prices. Markets reacted positively with the more domestically-focused FTSE250 leading the way in the hope that pressure is finally reducing on UK consumers and borrowers.

Despite the decline, most economists surveyed by Bloomberg still expected the BoE to raise rates the next day. What happened of course is that both UK and US Central Banks held rates at current levels, providing us with the clearest signal yet that interest rates are at least close to a peak.

The knock-on effects could be seen almost immediately. The yield on UK government bonds dropped, and sterling weakened – the latter can of course be a good thing for companies with overseas earnings. Leading mortgage lenders have also started to cut rates on their fixed deals, offering a welcome boost to the housebuilding sector.

The Bank of England statement told us two things – that the decision to hold rates was made by a slim majority, and that borrowing costs should stay high until ‘material progress has been made in returning inflation to the 2 per cent target’. We are still three times above that of course and the Bank wants the public to believe that rates will not come down significantly any time soon. Both consumers and businesses should therefore continue to adjust to a world of higher borrowing costs and lower spending.

Whilst the most recent consumer confidence survey showed an increase to its highest level since January 2022, supported by strong wage growth and easing inflation, it might not take much to knock it back again and I am mindful of Robert Louis Stevenson’s phrase that sometimes ‘to travel hopefully is a better thing than to arrive’.

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