Bank of England: Unlucky 13?

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 22 June 2023. Past performance is never a guarantee of future performance.

The Bank of England has again voted to raise interest rates – for the 13th consecutive time – as it continues its energy-sapping battle to dampen domestic inflation, which remains stuck at 8.7%¹. 

The half-point rise was bigger than initially expected and takes the base rate to 5%.  

In the run-up to the latest hike, there had been feverish debate about the difficult conditions and narrowing options facing the Monetary Policy Committee (MPC). Only two days before the MPC meeting, an average 2-year fixed mortgage rate shot above 6%, while the number of available mortgages also fell, as lenders adjusted to anticipated higher borrowing costs². 

Meanwhile, movements in the gilt market – where there is sensitivity to short-term interest rate speculation – were closely watched by investors. At the beginning of the week, yields had risen to levels not seen since 2008.  

In an echo of the previous three MPC meetings, the rate rise was passed by a 7-2 vote. The contrarians remain Swati Dhingra and Silvana Tenreyro, who continued their recent history of voting to keep rates on hold.

The need for confidence

As we have previously mentioned, policymakers face the unenviable task of taming inflation (through rate rises) without causing too much collateral damage. 

Unfortunately, as rates keep trending up, there is an increasingly fine line being walked between asking borrowers to dig deeper, and making their debt – particularly mortgages – unaffordable.  

And despite monetary policy being independent of politics, there is no getting away from the fact that this is a serious headache for the government during a cost-of-living squeeze, and in the run-up to the next General Election.  

In an effort to show unity with the BoE, Chancellor Jeremy Hunt pre-empted more hikes, and the inevitable scrutiny, back in May by going on record as saying: “If we want to have prosperity, grow the economy, reduce the risk of recession, we have to support the Bank of England in the difficult decisions they take.” He doubled down on the support by insisting, “It’s not a trade-off between tackling inflation and recession, in the end the only path to sustainable growth is to bring down inflation.³”

Narrowing options

As stated in the MPC meeting minutes, the 0.5% rise was driven by challenging and stubborn economic conditions: “There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand.⁴”

It is now apparent that the UK lags major peers in taking the sting out of inflation. Only last week the US Federal Reserve opted to pause hiking, preferring to wait and see if previous rises had been sufficient to dampen inflation. 

And as mentioned in our Mid-Year Outlook report, the UK has little room for manoeuvre in the face of heavy cost-of-living pressures, a high tax burden and now even higher interest rates. 

While there is increased focus on the probability of a recession, indicators currently suggest that is unlikely to occur this year (although not impossible), while 2024 may yet bring a recovery of sorts.

Until next time

A 13-in-a-row hike record is one that will hang over the MPC until its next meeting on the 3 August. 

By then, it may be clearer as to whether the most recent increases have started to have a collective effect, or if more work is needed. The longer the hiking continues, and the bigger the pressure heaped on UK households and businesses, the greater the impact on the-already-anaemic growth prospects. 

That said, there is a belief amongst policymakers that inflation will cool. In the words of the BoE: “CPI inflation is expected to fall significantly further during the course of the year, in the main reflecting developments in energy prices. Services CPI inflation is projected to remain broadly unchanged in the near term. Core goods CPI inflation is expected to decline later this year, supported by developments in cost and price indicators earlier in the supply chain. In particular, annual producer output price inflation has fallen very sharply in recent months. Food price inflation is projected to fall further in coming months.⁴” 

For now, the market is pricing in a rate of 6% or more by the end of 2023, before things potentially moderate in 2024.

In the meantime, a hot summer awaits and only time will tell how much inflation has continued to scorch the UK economy.

Related articles

Disclaimer

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.

This communication: 

(i) 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;

(ii) 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; 

(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and

(iv) 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.