Just a few weeks ago it was widely expected that the Bank of England would increase interest rates for the second time in a decade at todays meeting. However, that looks unlikely now given a more cautious Governor in the form of Mark Carney and weaker than expected growth over the last quarter. As such, the impact on markets is likely to be minimal with recent events reducing the probability of an interest rate hike to just 10%.
That being said, it does look like policy direction is going to change in the near future and we believe a period of interest rate hikes lies ahead for the UK. The current backdrop of global growth is the most synchronised it has been for almost ten years and the subsequent spill over from this will inevitably affect the UK economy.
Another factor to take into consideration is the stubbornly high level of inflation which is finally starting to fall. The impact of a weaker pound in the wake of last year’s referendum pushed inflation over the Bank’s target, but over the last year sterling has been appreciating meaning UK inflation looks set to keep falling.
Those looking for interest rate movements should point their gaze to August and November as these meetings are accompanied by the quarterly inflation report. November seems a particularly sensible month to move as we’ll have found out the decision on the UK’s divorce settlement from the European Union by October and the Bank can make any decisions with this in mind.
Six years into the current economic cycle, we are arguably closer to the end than the beginning and when the eventual slowdown does come it is important that the Bank of England has sufficient room to cut interest rates in order to stimulate the economy. With rates still rooted at emergency levels, this is one of the challenges faced by the Bank and how it chooses to deal with this will be key to the success of the UK economy in coming years.
Deputy Chief Investment Officer