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UK interest rates: the time for a 0.5% hike may have passed – Aegon AM’s Lynch

James Lynch, Fixed Income investment manager at Aegon Asset Management, said:

 “We have another ‘live’ BoE meeting this Thursday. We expect a 0.25% move higher to take the policy rate to 1%.

“The market is anticipating more than this with expectations of a 0.30% move, reflecting the risk of a 0.50% move which has become the increments that the US Federal Reserve now appear comfortable with.

“However, I suspect the time for a 0.50% move has now passed. The UK is five months into the rate hiking cycle and the members of the MPC who were supporters of this move in February were in general of the view that it was more about getting to the end point faster than where interest rates finally end up.

“As much as I would like more clarity on where the nine members of the MPC believe the policy rate will finish at, I don’t think we will get it. The uncertainties are high on all fronts.

“On growth, the UK has significant headwinds in 2022: we have the shock to households from the rise in taxes, energy bills and general cost of living; we are starting to see consumer confidence surveys fall; and employment growth is starting to slow. They will also most likely highlight the risk of a European slowdown on the back of a potential embargo on Russian energy.

“On inflation, the BoE is uncertain of the second-round effects we will get, how much becomes embedded in inflation expectations going forward and raises wage expectations. This would require a more aggressive hiking response.

“It is a judgement call from the MPC members and I suspect the decision will not be unanimous, which will not help clarity.”

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