AJ Bell press comment – 27 January 2023
Laith Khalaf, head of investment analysis at AJ Bell, comments on the upcoming rates decision from the Bank of England:
“It’s less than two months since the Bank’s last interest rate decision, but a lot has changed which will make policy makers think twice about pushing rates up too much. In particular gas prices have fallen substantially, and while this is yet to make its mark on the Consumer Price Index, some welcome downward pressure on inflation is in the post. Of course, commodity markets are volatile and unpredictable, so it’s unwise to count too many chickens before they hatch, but nonetheless this is a very welcome development for consumers and businesses. It’s also a shot in the arm for the Treasury, who should now find the energy support scheme for this year less costly than anticipated.
“Markets are currently expecting interest rates to peak at 4.5% in 2023, which looks a reasonable estimate as things stand at the moment. This is notably lower than the 5.25% peak anticipated when the Bank last produced a full economic report in November 2022 and shows how significantly expectations have shifted. Other things being equal this should push economic growth forecasts up, so it’s surprising to note unofficial reports that the OBR is actually set to downgrade the UK’s growth forecast for 2024 as a result of continued inflationary pressure.
“While commodity prices have fallen back, the UK’s labour market remains extremely tight and that’s a reason to be concerned that inflation may prove sticky. If the Bank of England also takes this view, it may well push ahead with more aggressive interest rate hikes than currently anticipated, or keep rates at a higher level for longer. If inflation falls back to more modest levels but remains stubbornly above the 2% target, this sets the Bank on a collision course with the public and politicians. No-one doubts the need for higher interest rates when inflation is at 10%, but if it gets back to say 4%, dissent to monetary policy pain is likely to swell.
“That’s a problem for another day though. As things stand at the moment, 2023 looks like picking up where 2022 left off, with more interest rate rises. Markets are pricing in a 0.5% hike at the forthcoming meeting, which would take us up to the heady heights of 4%. However, in December two members of the rate-setting committee voted to keep rates at 3%, and with signs of easing inflationary pressures more members may be tempted to join the dovish camp.”
