Written by Georgina Taylor, Multi-Asset Fund Manager at Invesco
Central Banks are still treading the inflation-recession tightrope. Aligning the policy response of Central Banks with backward looking economic data releases is a tricky path for investors to navigate over the coming months.
This dilemma is particularly acute for the Bank of England and the UK outlook given the cost of living crisis.
Arguably the Bank of England should only increase the base rate by 25bp today given the UK economy’s heightened sensitivity to higher interest rates versus other economies.
However, it is very likely that they hike by 50bps as a behavioural response to other Central Banks hiking to stave off inflation and the risk of being seen to being behind the curve. This isn’t a great outcome for the UK and we could even see the pound weakening in response given the risk higher interest rates pose to economic growth.
This macro environment is a test for all Central Banks to prove two things: First, that they have not already made a policy mistake, and second, that they actually have the toolkit available to tackle inflation – their credibility is at stake. Risk assets may struggle to make meaningful progress while this Central Bank debate continues.