June 2023 Wrap Up
What were the key moments in the market this month?
Fed takes a breather in 15 months
On June 14, the Federal Reserve decided to break the pattern of increasing interest rates by leaving the current interest rates unchanged. However, the decision to postpone the hike during this two-day meeting was accompanied by a projection indicating that two additional quarter percentage point increases are expected before the year ends. This hawkish pause leaves the key borrowing rate consistent within a target range of 5%-5.25%.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the post-meeting statement said. The upcoming Fed meeting will be on July 25-26.
BoE springs a surprise with hefty rate hike
The Bank of England shocked the market by implementing a 50 basis point increase in interest rates, making this their 13th consecutive hike on June 22. Supported by a 7-2 vote from the Monetary Policy Committee, the bank’s base rate rose to 5%, contrary to market predictions that anticipated a 25 basis point increase. Following the announcement, sterling weakened against the dollar while yields on UK government bonds retreated slightly.
“The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labor market conditions and the behavior of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the MPC said in its summary.
Mexican peso soars while exporters hold their breath
The Mexican peso has climbed to its highest against the US dollar in seven years, prompting the president to celebrate its strength. Nonetheless, analysts are cautioning of repercussions on exports and remittances. With a significant surge of 12% against the dollar this year, the peso stands as one of the top-performing currencies. The momentum of the peso’s gains is predicted to persist as increased inflows of funds continue to be attracted to the country due to higher yields.
With the recent exchange rate decreasing to around 17 pesos per US dollar from 19.50 pesos per dollar last December, Mexican exports have become pricier. “A prolonged appreciation of the super peso could be more harmful than beneficial,” said Guillermo Mateos, an analyst at Banco Base, noting it could slow down exports as they get pricier.
Turkish lira plunges to new lows
After Turkey’s central bank increased the benchmark interest rate from 8.5% to 15% on June 22, the Turkish lira plunged to new record lows. In a dramatic monetary policy reversal, an increase of 650 basis points marks the first hike since March 2021. Despite this move, many are concerned that this won’t be enough to overcome rising inflation and a continuing economic crisis.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” newly appointed Governor Hafize Gaye Erkan said in a statement Thursday. According to Turkish Finance Minister Mehmet Simsek, implementing a consistent fiscal policy and maintaining a free exchange rate regime will “ensure that the Turkish lira regains stability and becomes a reliable currency.”
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