Markets don’t like surprises. Fortunately, central banks stuck to the script last week and delivered the rate rises and messages that investors were expecting.

The US Federal Reserve announced a 0.25% hike, marking a downshift from the pace of previous increases. Meanwhile, the Bank of England (BoE) and the European Central Bank (ECB) both raised rates by half a percentage point. Tellingly, the BoE dropped its previous guidance that rates were likely to rise again.

Fed Chair Jerome Powell insisted that the committee planned to further tighten policy and that it has “a long way to go” before victory against inflation could be declared. But the response from markets suggests they are already driven by a belief that inflation has peaked and that the lagged effect of rate rises will slow the global economy, forcing rate hikes to be reversed later this year.

Global equity markets continued their ascent on hopes that there is light at the end of the tunnel. The S&P 500 Index is now up nearly 8% in 2023, despite taking a dip on Friday on news that the US economy added 517,000 jobs last month, more than double the consensus forecast. Investors see signs of weakening in the labour market as a key factor in bringing down high inflation.

The STOXX Europe 600 Index has enjoyed its best start to the year on record. And the week ended with the FTSE 100 Index closing at a record high, lifted by hopes that inflation is on the wane and a weak pound will help UK firms abroad. The index is dominated by banking and energy companies, which earn most of their money overseas.

Bond markets have also surged so far this year, and in the aftermath of the ECB’s interest rate announcement, 10-year German bonds saw their biggest rally in more than a decade. This came despite news at the beginning of the week that the German economy unexpectedly shrank in the fourth quarter.

The risk to investors is that markets get too far ahead of themselves and central bank policy actions. “In the short term, improving sentiment could lead to an outcome where it appears that higher interest rates are having relatively little bearing on the economy,” warned Mark Dowding of BlueBay.

“Paradoxically, we might observe that the stronger the economy and markets at the start of the year, then the weaker the outlook for both will be later in 2023. Conversely, if things looked materially weaker now, then this could be more of a harbinger of a stronger second half of the year.”

After $14 trillion was wiped off the value of global equities in 2022, this year has already seen $4 trillion regained. Since 1950, there have been four calendar years in which the US stock market, like last year, fell more than 15%. On average, the market rose 12.9% in the following year, underlining the tendency of good years to follow bad ones, and the importance of investors holding their nerve.

On Tuesday, the International Monetary Fund (IMF) upgraded its 2023 global growth outlook, citing resilient demand in the US and Europe, and the re-opening of China’s economy. But the IMF painted a bleak picture for the UK, forecasting that it would be the only country to shrink this year across all advanced and emerging economies.

The downgrade was blamed on high energy prices, rising mortgage costs and increased taxes, as well as persistent worker shortages. An estimated 1.7 million mortgages will reach the end of their fixed-term rate this year, with the rise in rates expected to increase repayments by an average of £250 a month when those deals finish.

Regrettably for cash savers, banks have not been so keen to raise rates on savings accounts. According to Moneyfacts, the average instant access account still pays just 1.73%. If we are at, or near, the peak for interest rates, that could be as good as it gets.

In company news, Apple, Amazon and Alphabet all delivered disappointing results on Thursday, following on the heels of Microsoft the previous week. However, Facebook owner Meta bucked the gloomy trend in technology, confirming better-than-expected results. The stock surged as much as 26% – its biggest one-day jump for nearly a decade.

As a final thought, in its statement last week, the Bank of England warned of the long-term detrimental impact on the economy of early retirees and people who’ve left their jobs since 2020. However, lower productivity may not just be a problem created by those who’ve stopped work. The work-from-home environment could also become a factor. BlueBay reported on data from Netflix which showed that peak streaming times have shifted from Sunday evenings to weekday afternoons. Could distracted or demotivated homeworkers be ‘quietly quitting’?

If there’s one word to describe the UK tax system, it’s ‘complicated’. It’s easy to misinterpret the rules, and end up make some expensive mistakes, if you fall into one of the hidden tax ‘sinkholes’.

A prime example is the 60% income tax trap. It’s not published in any HMRC guidelines because it’s an unofficial effective rate of Income Tax. It occurs as a result of the tapering of the personal allowance for higher earners. The result? Those earning between £100,000 and £125,140 can end up paying 60% tax.

Even if it doesn’t apply to you, it’s worth knowing that taxes can appear almost by stealth, and certainly by surprise, in all sorts of different places.

“What the 60% rate represents is that these ‘sinkholes’ can appear anywhere – tax allowances change frequently, and those changes can affect you,” warns Melloney Underhill.

If you earn £100,000 or more, the £12,570 personal allowance is slowly reduced. The personal allowance is the amount of income you can earn each year without paying Income Tax. It’s currently tapered away at a rate of £1 for every £2 you earn above £100,000.

In hard terms, this means that for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in Income Tax, while another £20 is lost by the tapering of the personal allowance. This amounts to a 60% tax rate. Once you’re earning £125,140 or more, you don’t get any personal allowance at all.

You can mitigate and even avoid this sinkhole completely, with the right financial advice and a little bit of careful forward planning.

“The quickest and simplest way is to pay more into your pension before tax-year end, so you reduce the earnings that fall into that bracket,” suggests Underhill. “This way, you save Income Tax and boost your retirement fund at the same time.”

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

“We need to stay the course, and in my view the next step in the Bank Rate is still more likely to be another hike than a cut or hold.”

Bank of England Monetary Policy Committee member Dr Catherine Mann gives her view on the likely direction of interest rates in the coming months