Interest rates expected to continue to climb but is this the peak?

by | Jan 30, 2023

Bank of England

James Lynch, Fixed Income investment manager at Aegon Asset Management, comments on the Bank Of England’s upcoming interest rate decision:

 “The Bank of England (BoE) will be making another interest rate decision on 2 February with the current policy rate at 3.50% and the market expecting a 90% chance of a 0.50% increase. These large increments seem to be the norm these days, after the last four meetings have declared moves of three for 50bps increase and one for 75bps.

 “However, if we take a step back, it is still rather unusual for policy rates to be increased at these large clips.  It used to be ‘hike in small steps and cut in large ones’. The rationale amongst policy makers was to increase in large steps so it was not necessarily about getting to a higher peak rate, just to get there quicker so less needs to be done in the long run. Our expectation for the BoE is that they are indeed coming towards the end of the hiking cycle but, with little commentary from the MPC members, it is quite difficult to gauge the exact timing and peak of the policy rate. We are thinking it could be lower than market expectations and, possibly, February could be the last hike.  

“Another difficulty is that the nine MPC members who vote on policy rates are split. Last time they were divided into three camps: two for hold, six for 50bps increase and one for 75bps increase. The guess is they are all looking at different types of data. Some are more interested in wages and inflation expectations, while others think we are already in restrictive territory and want to take time to see how the long and variable lags of monetary policy work their way through the economy.”

 

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