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24 Nov 2023 - Hedge Clippings | 24 November 2023



Hedge Clippings | 24 November 2023

As much as we'd like to move on from discussing inflation in Hedge Clippings each week, the reality is that while lower than it was, it will be some time before the genie is safely back in the bottle. And while that's the case, there's little chance of interest rates falling, either locally or offshore in the US, UK or Europe. In the US there were hopes that they might consider easing sooner rather than later, but more recent minutes from the Federal Reserve's November meeting indicate a distinct unwillingness to do so, fearing that pivoting to a downward trend in rates too soon would potentially waste the hard won success to date. If anything the Fed warned rates could still rise if required, and meanwhile they'd "proceed carefully" before moving.

In the UK - where inflation has been as high as 11% and is now back down to 4.6% - the message is the same. The UK kept rates steady at 5.25% for the second time following 14 consecutive hikes, but BoE governor Andrew Bailey was clear that he wasn't going to be rushed into cuts, saying the fear of persistent inflation was too great to risk doing so. Equally ECB president Christine Lagarde echoed those thoughts.

Meanwhile at home freshly appointed RBA governor Michele Bullock scotched any thoughts that the fight had been won, even singling out dentists and hairdressers as jumping on the price rise bandwagon and pushing up inflation in the services sector. While unlikely that there'll be a further rate rise in December, and with no RBA meeting in January, it doesn't rule out yet another move upward in February or March. If anything Bullock is sounding more hawkish than Philip Lowe, possibly because she doesn't have his legacy of saying rates wouldn't rise until 2024.

As Bullock noted in her speech to economists during the week, interest rates are a "blunt instrument" when it comes to taming inflation, but it's also pretty much the only instrument she has. And as we've noted before, that instrument strikes those least able to cope, assuming they have a mortgage.

What hasn't happened yet - and we don't believe it will - is that increased mortgage rates will lead to an increase in arrears, and subsequently forced sales and falling house prices. That scenario would only be predicated on a full scale recession, which we also think unlikely.

Even without a mortgage, rental rates are also increasing as investors strive to offset increased repayments, added to which the overall housing shortage is being magnified by short terms rentals via the likes of Airbnb, and high levels of immigration.

So the outlook remains for inflation to remain front and centre, and therefore on our weekly agenda, for some time to come.

Meanwhile, this week marked a few milestones and anniversaries - the most poignant one probably being the assassination of President Kennedy in Dallas 60 years ago last Wednesday. Once known by all those old enough to remember where they were when they heard the news, there's now a whole generation for whom the death of JFK is just a page in the history books. More up to date, and still on the subject of US presidents, three years ago today the formal transition to Joe Biden's administration began - so that's three years of Donald Trump claiming he didn't lose the election.

You can't say he isn't persistent!

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