AJ Bell press comment – 9 June 2022
- Next MPC interest rate decision is Thursday 16 June
- Markets are pricing in a fifth consecutive interest rate hike
- Any dovishness is likely to see the pound punished
- Further sterling weakness would push up the cost of fuel for consumers
Laith Khalaf, head of investment analysis, AJ Bell:
“The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets. Sterling has already fallen around 8% against the dollar this year, even though markets are pricing in a fifth consecutive interest rate rise from the Bank of England in June, so any signs of dovishness could weaken the currency further.
“The problem is that the Bank is caught in a pincer movement, with eye-watering inflation on one flank, and the risk of recession on the other. News that the average cost of filling a family car is set to breach £100 landed on the same day the OECD forecast the UK will be the weakest G7 economy in 2023, which sums up the bind the central bank finds itself in. By raising interest rates, the Bank is putting the brakes on an economy that is already slowing of its own accord. That risks the economy stalling, or worse, going into reverse.
“The Chancellor’s latest package of measures to address the cost of living crisis does alleviate some pressure on the Bank, offering up a bit of breathing space to raise rates. Consumers probably won’t be best pleased to find that some of the fiscal giveaways they have been handed by the Chancellor are going to be gobbled up by higher borrowing rates. But if the Bank fails to take action and the pound comes under further pressure, that also adds to the cost of living crisis, by pushing up the price of commodities priced in dollars, especially fuel. It feels like there are simply no good options in front of the Bank of England.
“A rate hike will feed through into higher mortgage rates, though the effect on consumers is likely to be a slow burn, as homeowners roll off the fixed deals which became so popular as rates plummeted. On the flip side of the coin, we can expect better returns for cash savers, who are now seeing significantly higher interest rates on offer, though they probably have to seek them out. Of course, that is an entirely pyrrhic victory with inflation heading into double digits.”