Calmer conditions for banks, sticky food prices and pound lifts on UK interest rate expectations

·    Markets more positive amid hopes that banking contagion has been contained.

·    Oil price hovers just under $78 as calm returns and demand expectations lift.

·    Andrew Bailey stressed interest rates could move higher if inflationary pressures continue.

·    Sticky prices mean consumers are still in a jam with food price inflation hitting fresh record levels according to the BRC.

·    Sterling gains ground to above $1.23 after Bank of England governor’s speech.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘’A relief ripple is helping stocks make some gains amid hopes that the volatility, which has wracked the banking sector, has eased off. The S&P 500 closed higher and although trade was a little choppy in Asia, with the Nikkei dipping into negative territory, futures point to a slightly higher open in Europe and the United States.

The purchase of large chunks of Silicon Valley Bank’s assets by First Citizens has steadied nerves but some caution is set to remain about potential repercussions. With contagion limited for now, hopes that the debacle will have less of an impact on global growth have ticked up a little. Reports that the flow of deposits from smaller lenders to larger banks in the United States has slowed also appear to have helped sentiment.

The oil price is hovering just under $78 a barrel after surging on Monday, helped by calm returning to the banking sector and expectations of a recovery in Chinese demand. Supply concerns also pushed prices higher after oil exports from the Kurdistan region through Turkey were halted when a court ruled that Ankara has breached a pipeline agreement with Iraq. However, they are still near levels last seen in December 2021, indicating that worries are still lingering about a possible recession in the US, and the knock-on effect for global trade. Gold prices have dipped back a little from the highs of last week, but they are not far off prices reached during the early months of the pandemic in the summer of 2020. There are concerns that the banking scare could lead to a more risk averse attitude among lenders, adding another squeeze to liquidity, just as companies are grappling with high interest rates.

Right now, worries about the impact of banking turmoil are taking a back seat and the Bank of England is intent on steering consumer prices lower. Governor Andrew Bailey stressed in his speech in London last night that interest rates may have to move higher if there were signs of persistent inflationary pressure. For now, policymakers don’t see a threat to financial stability in the UK, given that banks are resilient with robust capital positions. The focus is on sticky prices and consumers are still in a jam with food price inflation hitting fresh record levels according to the British Retail Consortium. Shoppers are paying 15% more for the same goods compared to a year ago, with fresh food inflation accelerating to 17%. The prices for chocolate have rocketed, leaving a sour taste just in time for Easter, when confectionary eggs will be in high demand.

The pound has made fresh gains, amid expectations that another hike looks more likely in May, with fingers looking more likely to stay away from the pause button until mid-summer. As sterling strengthens, it should help bring down prices, given the weakness in the pound over the past year is partly behind scorching prices, as it makes imports even more expensive, but it’ll take time to feed through. The pound has gained 16% against the dollar since the disastrous mini-budget in September, but it’s still 12% lower than its level back in June 2021.’’