Bank of England: A 15-year high
Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 2 February 2023. Past performance is never a guarantee of future performance.
Faced with stubbornly high inflation of 10.5%, the Bank of England today opted for another 0.5% rate rise, taking the base rate to 4%.
In doing so, it achieved two uncomfortable milestones – the highest base rate in 15 years, and the tenth consecutive rate hike.
It caps a gloomy week for the UK, with the International Monetary Fund having downgraded the country’s growth forecasts, and amid large public sector strikes in disputes over pay.
Better times ahead?
The decision to hike mirrored yesterday’s news from the US, where the US Federal Reserve also opted to keep raising rates in the face of entrenched inflation, albeit in smaller increments – see Fed: A more-but-less approach for more information.
While today’s decision heaps more pain on UK mortgage holders, there was at least a glimmer of hope in the commentary that accompanied the rate rise. Emerging signs that domestic inflation continues to ease, point to the end of aggressive rate hikes being in sight.
Nonetheless, the BoE’s statement was clear that uncertainty remains a problem: “Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices… The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. There are considerable uncertainties around the outlook1.”
Tellingly, the Monetary Policy Committee (MPC) remains divided on the best course of action to take, with a split 7-2 vote behind today’s rise. Swati Dhingra and Silvana Tenreyro were two contrarian voting members, each believing that no rise was needed and that a base rate of 3.50% was sufficient.
MPC members know all too well that they walk a fine line between fighting inflation and staving off recession risk. The central bank acknowledged the predicament: “UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report. The labour market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output1.”
Despite a relatively strong bounce back when lockdown restrictions were lifted, the UK economy faces a tough few months ahead, with the risk of a recession this year growing.
While any slowdown will likely be shallow and relatively quick, domestic conditions contrast with the US and Europe where relatively more economic optimism seems to abound.
The UK government has already indicated that it sees little flexibility with fiscal policy, ruling out significant tax cuts in the next budget. In parallel, the Bank of England knows that rate rises are heaping pain on homeowners and businesses, and it won’t want to be too aggressive with its monetary policy.
On the plus side, the worst of the inflation battle appears to be over. Investors will be relieved.
Please note: Market Perspectives returns on the 6 February 2023.
This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.
This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.
- is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
- is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
- is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
- has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.