Laith Khalaf, Head of Investment Analysis at AJ Bell, comments on the MPC’s latest Monetary Policy Report: “Another day, another interest rate hike. It’s business as usual for the Bank of England’s rate setting committee, with two zealous members actually wanting to raise rates to 5.5%. However, its own numbers show that more interest rate hikes will make almost no difference to inflation in the medium term. But they will of course inflict more pain on consumers and businesses, and in particular mortgage holders. Sometimes doing nothing is the hardest approach, but there is increasing evidence that’s the path the Bank should now be following.
“Based on their own projections, inflation will fall to 1.5% in three years’ time if the Bank hikes rates to 6% and then trims them back to 4.5%. At the same time its forecasts say CPI will fall to 1.4% if interest rates just stay where they are. This supports a pause in rate hikes, especially because the cost-of-living crisis engulfing consumers is currently being exacerbated by high interest rates. The full effect of monetary policy takes around 18 to 24 months to ripple out into the economy, so a hiatus in rate activity would also give the bank more time to assess the impact of its past actions.
“Furthermore, the news from the Bank on the economy is not bright. Britain better prepare for economic stagnation, because the latest projections from the Bank of England show almost no growth in the coming two years. That won’t be pleasing music to the ears of the prime minister, who has pledged to grow the economy as one of his five promises to the electorate. Technically the 0.3% projected rise in GDP over the next year is growth, but if the forecast proves accurate, it will be a feeble offering ahead of the 2024 election.
“On the plus side for Rishi Sunak, the Bank thinks CPI will fall to 5% by the end of the year, which means he’s on target to meet his promise to halve inflation. Of course, price rises of 5% for consumers are still deeply uncomfortable, especially on the back of the double digit inflation we have seen over the last year or so. Little wonder that pressure on household finances is finding its way into wage demands, which itself is stoking a second round of inflation after the energy and food price spike.
“Meanwhile although the housing market is on the wane, a correction rather than a crash seems most likely, even as prices have fallen at their sharpest annual rate since 2009. The one positive we can take from the UK economy is low unemployment. In the depths of the financial crisis, unemployment rose to 8%; today it sits at just 4%.”
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