The Bank of England (B of E), U.S. Federal Reserve (Fed) and European Central Bank (ECB) all raised benchmark rates by 0.25% in order to tame inflation that remains substantially above target in all three territories. In the B of E’s case, it was the 14th consecutive increase, a damning indictment of its ineptitude by allowing inflation to reach double digits in the first place. Our guess is that having been far too complacent initially, such rapid tightening will deliver recession, not just in the UK but across the developed world.
In the U.S., Fitch cut the federal government’s borrowing rating from AAA to AA+ due to the “expected fiscal deterioration over the next 3 years”. This is a rare event; the last time the U.S. received a downgrade was in 2011 when Standard & Poors did likewise in the wake of the financial crisis. Rating changes are always a judgement call but Fitch is flagging that over $32 trillion of debt now represents a credibility problem, especially as its servicing cost keeps rising and the U.S. debt ceiling was only recently lifted. It would be no surprise to see another debt ceiling standoff sooner rather than later.
As we’ve commented before, wherever one cares to look, it’s not a pretty picture. The irony being that agencies charged with monetary stability are, perversely, responsible for the exact opposite.
