Laith Khalaf, head of investment analysis at AJ Bell, looks forward to this week’s interest rate decision form the Bank of England:
“This week’s interest rate decision sits on a knife edge. Markets are currently pricing in a 60% chance of a rate cut, which signals a split vote from investors on whether the Bank is likely to take any action. The market is more confident we’ll get a cut by September’s meeting, and is almost certain we’ll get two rate cuts by the end of the year, according to Refinitiv data. As always these forecasts are based on market prices, which do bounce around quite a bit, and are vulnerable to fresh economic data shocks and pesky observed reality impinging on the future.
“The Bank’s interest rate decision is more symbolic than substantial. A rate cut marks an entry into a new phase of interest rate policy, but at street level the reality is financial conditions won’t change much. Especially for the hoard of people who will be rolling off cheap fixed rate mortgages this year and encountering a new and bracing financial reality
“A rate cut would be good news for Rachel Reeves, as it would free up some money in the public finances and help stimulate economic growth. As things stand though, the Bank of England is flying a bit blind as to what fiscal policy will be, seeing as our new chancellor won’t deliver her first budget until Autumn. The recent news that public sector pay recommendations will be followed will provide some food for thought for the central bank, as that will drive up wages and potentially add inflationary pressures into the system.
“However, we have come a long way from double digit inflation, even though it is still seared into most of our wallets. CPI has been bang on target for two months now, but the effects of interest rate hikes are still working their way through the system, so increasingly the Bank has to justify keeping rates on hold rather than cutting them.
“We’ll also be getting a full Monetary Policy Report this week which will provide a swathe of the Bank’s latest economic predictions. One of the key metrics to focus on will be the Bank’s updated growth forecast, to see whether the dial has shifted in a positive direction. The Bank has been at the gloomy end of forecasts in recent times, so some Tiggerish optimism might be too much to expect. For the moment Rachel Reeves can shrug off any disappointing growth forecasts by simply pointing across the aisle, but that routine will wear thin pretty fast, and before you know it any weak growth will start to stick to the new chancellor rather than her predecessors.”
