Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“The split vote from the Bank’s interest rate committee puts the cat squarely amongst the pigeons. The market was happily assuming the interest rate hiking cycle is well and truly done and dusted, but three members of the policy committee think there’s still a case for higher rates. It’s a salutary lesson that the Bank’s primary focus is inflation, and that you shouldn’t try and second guess the voting intentions of nine people in a room. For now, the mixed outlook from the Bank’s interest rate committee will probably act as a brake on the fall in short term interest rates we’ve seen in the last couple of months, and put upward pressure on mortgage market pricing.
“It’s two years since the Bank of England first started raising rates from the historically low rate of 0.1%, and when you look back at how far we’ve come it’s hard not to feel a dizzying sense of vertigo. Markets are now thinking what goes up must come down, and are pricing in a slew of interest rate cuts next year. That looks premature and probably reflective of the current sentiment in markets, driven especially by the US Fed’s latest more dovish stance on interest rate policy. Going forward wage growth is a key metric to watch in the UK. This has been falling back, but the hawkish members of the committee believe current levels are incompatible with meeting the 2% inflation target, and increases to the National Living Wage may serve to embed higher wage demands.
“Even if interest rates may have peaked, the pain caused by higher borrowing costs hasn’t. The Bank of England reckons that less than half the effect of existing interest rate rises has been felt, as homeowners continue to roll off cheap fixed term deals and businesses refinance their debt, while at the same time facing constrained consumer spending. Unfortunately there’s plenty of economic pain left in the post. While we should acknowledge the change in market expectations for future interest rates, we should also recognise that the big gear shift in monetary policy over the last two years creates a particularly wide landing zone for the economy. Forecasts are all well and good, but they are particularly vulnerable to being blown off course by evolving economic data.”
