AJ Bell press comment – 15 December 2022
Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“Anyone who wanted an interest rate rise for Christmas has got it, but consumers will be wondering whether this is bad or good because while savings rates will rise, so will borrowing costs. Indeed, it’s not just food and energy prices which have shot up this year, the cost of money itself has soared. A year ago, the Bank of England base rate stood at just 0.1%, keeping down the costs of mortgages and loans, and helping to grease the wheels of the economy. Today the base rate is 3.5%, and that is gradually going to become front and centre of the consumer crunch, as the impact of higher interest rates gradually ripple out into the real economy.
“2022 has been about whether the Bank of England is up to the task of taming inflation, on which score it’s really pulled every lever that could be expected. There are now very good reasons to think that we are slipping off the back of the peak in inflation, but there are still risks emanating from energy prices and the labour market. 2023 might therefore be about how the central bank reacts to stickier, but more modest inflation. It’s not very controversial to raise interest rates when inflation is in double digits. Rate rises hurt, but most people nod their head sullenly and mutter something about the greater good. If inflation falls to more modest levels, though still above the 2% target, the interest rate committee may come under pressure to loosen things up a bit. Most people would probably tolerate 3% inflation if it meant mortgage rates coming down.
“We also have an almost certain recession to deal with in 2023, which may have already started. The good news is it’s expected to be a shallow dip, the bad news is it looks like being quite lengthy. It’s notable that the Bank’s recessionary forecasts were built on market expectations for interest rate rises at the end of October, which were running hot following the explosive rise and fall of Trussonomics. Based on interest rate expectations today, the economic outlook would be a bit better, and the Bank also expects the government’s energy price plan to deliver around a 0.4% boost to economic growth in 2023. The updated economic forecast we get from the Bank in February is therefore likely to be a bit improved, though still far from rosy.
“It was notable that unlike last month, in its latest commentary the Bank didn’t choose to take issue with market expectations for future interest rates, which suggests these are now more in tune with what policymakers are thinking, namely a peak of around 4.5% next summer. Clearly there are lots of factors which can move the interest rate peak up or down, but for now 4.5% looks a reasonable working assumption.”
