- CPI will fall back to target…
- …but then rise again
- Growth forecasts upgraded, but still anaemic
- Consumers are still facing a triple whammy of rising prices, higher rates, and more tax
- Budget tax cuts might be pie in the sky
Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“Inflation is expected to fall back to target in the spring, but before anyone pops any corks, it’s then forecast to pick back up again towards the end of the year. With plenty of the economic impact of previous interest rate rises still to be felt, it’s no surprise the Bank are sitting on their hands, and that might be the pattern we have to get used to for some time. The market is getting excited about rate cuts though, pricing four in this year. In the last few months monetary conditions have eased as a result of expectations of looser policy, so the Bank probably wants to put a floor under optimistic speculation which might undermine its battle to tame inflation. Let’s not forget the backdrop to this meeting was an inflation reading which actually went up, and a previous vote where three members of the monetary policy committee wanted to hike rates to 5.5%. That has now dropped to two, but still shows that some hawkishness is still in the air at the Bank of England. Notably though, one member, Swati Dhingra, voted for a rate cut, the first time any member of the Committee has done so since rates were raised to 5.25% last August.
“The Bank has also significantly upgraded its growth forecasts, but that’s hardly a surprise seeing as these are based on market expectations of interest rates, which have fallen by over 1% for the coming year. With 0.25% growth forecast this year and 0.75% in 2025, there’s little cause to cheer the upgrade. Although, the Bank of England is at the less rose-tinted end of economic forecasts. Back in November the OBR predicted growth that would come in at 0.7% for 2024 and 1.2% for 2025, while the latest forecasts from the IMF suggest growth of 0.6% in 2024 and 1.6% in 2025. The dismal nature of the science of economics means it’s impossible to tell who will prove to be right, but significantly no-one is predicting barn-storming growth this side of an election.
“The Bank now reckons that CPI will fall back to its 2% target in the coming months, but this will prove to be a false dawn, as inflation will pick up again at the back end of the year, thanks to the impact of lower energy prices unwinding. Indeed, falling energy prices are expected to be the big factor bringing inflation down below 3% in 2024, but as everyone in the country now knows, energy markets are fickle beasts. That’s thrown into sharp focus by the crisis in the Middle East, which is serving to elevate oil prices, as well as shipping costs.
“Geopolitical risks aside, the inflation outlook is significantly better than it was just a few months ago, but the UK public is still reeling from the treble shock of rising prices, higher interest rates and more tax to pay. No doubt the government would like to pare back some of the tax increases which were announced in the wake of the mini-Budget. But most recently the chancellor has played down the prospect for tax cuts in the forthcoming Spring Budget, and that may well be because he has just received the first round of economic forecasts from the OBR.
“No doubt the chancellor will want to make some offer to taxpayers in the Budget if he can, as this is potentially the last fiscal event before the election. There has been talk of squeezing in an Autumn Statement before the UK goes to the polls, however that would presumably also mean having to grasp the nettle of producing a Comprehensive Spending Review, setting out expenditure plans for each government department until 2028. That may not be the prettiest bauble to dangle in front of the public ahead of an election. Rather it might be best to leave that to the incoming administration, with a polite note explaining the Exchequer’s financial situation.”
Effect on mortgages and savings
“Mortgage rates have been dropping back in recent months, providing some much needed respite to beleaguered homeowners. This latest decision from the Bank of England might firm up mortgage pricing a bit, but it’s unlikely to have a huge effect. That doesn’t mean there isn’t still a lot of pain in the post this year for mortgage borrowers, as millions will be stepping back through the looking glass from the heady days of near zero interest rates into a much harsher reality.
“In the savings market the latest decision might put a bit of a backstop under sliding fixed term rates, but again the impact is likely to be small. Savers are currently enjoying that long-lost feeling of getting a decent return on their money, but we’re probably just past the peak, and rates are likely to be on the slide from here on in. Further readings on inflation and wage growth are due later this month, followed by the Spring Budget at the beginning of March, which all might serve to rattle cages in interest rate markets, with the ensuing knock-on effects for mortgage pricing and savings accounts.”
