As Wealth Managers await the latest UK inflation data on Wednesday and then the Bank of England MPC’s base rate decision due this Thursday, investment professionals have been dusting down their crystal balls and giving their opinions on what this week might bring in terms of economic data.
Their comments are as follows:
Kevin Bailey, Managing Director at Wessex Investment Management said: “The Bank of England shouldn’t be increasing rates on Thursday. In fact, it should be reducing them. Threadneedle Street needs to prove it is independent of thought rather than a “follower of fashion”. The economy cannot withstand the predicted 0.5% increase. Individuals and businesses will suffer. Home repossessions will begin to increase as borrowers default on their loans. If rates are raised further on Thursday, the future is bleak.”
James Lynch, Fixed Income investment manager at Aegon Asset Management said: “This Thursday (22nd June), the Bank of England’s Monetary Policy Committee (MPC) is expected to vote for another hike in policy rates from 4.50% to 4.75%. However, given the recent data releases of higher-than-expected inflation and stronger wage growth, the meeting has become a little more interesting.
“The financial markets are now expecting five more 25bps increases between now and the end of the year, so the market will be looking for clues from the meeting minutes and the MPC voting pattern to ascertain how likely or not that profile is.
“On the voting, we could be back to three-way splits on the committee again, with two voting for unchanged, one or two voting for a 50bps hike, and the remainder in the middle voting for 25bps. On the finer details of the forward guidance, we have the minutes of the meeting to go on, but this is not a policy review meeting where we get updated fan charts, and there won’t be a press conference – so it’s not the most useful meeting in the event of a big change in guidance.
“The rationale for going higher on the bank rate is the stickier inflation, longer lags of monetary policy to work, and second-round inflation/wage spirals. On the inflation part, we get an inflation print on Wednesday morning – this could set the tone going into Thursday’s meeting. For the longer lags of monetary policy, this is true mainly down to the number of mortgages on ‘fixed rates’, but as we have seen recently, policy is at least starting to affect the mortgage market. For the inflation/wage spiral debate, there was news on Friday from the Bank of England’s own survey of the public’s inflation expectations, which showed another decline to 3.5% for 1y-ahead price changes. This will give some comfort to the MPC members as it now clearly shows that it peaked last summer at 4.90%.”
Luke Thompson, Director at PAB Wealth Management, is bracing himself for a further hike as he comments: “I think we are at a tipping point where the Bank of England really needs to think about what it is doing with interest rates. What they have been doing is having no real effect on the inflation figures and all they are doing is creating pain for homeowners. Even saying this, I expect them to up the base rate again by another 0.25%. They are following what they believe is a tried and tested path and I can’t see them deviating away from it. I think the Bank of England has handled the whole situation around the base rate terribly. 18 months ago they were telling us the inflation figures were transitory when they clearly weren’t and they were far too slow to react to inflation when it was starting to run away at the end of 2021. Andrew Bailey didn’t do a very good job at the FCA and he has followed that up by appearing to be out of his depth as the Governor of the Bank of England.”
John Choong, Equity Research Analyst at Investing Reviews, believes it rather depends on the inflation data and also warns of the impact of time lags as he comments: “Considering last month’s hotter-than-expected inflation and wage data, there are fears that the MPC will hike interest rates by 50bps on Thursday. That said, the all-important CPI inflation print will be released the day before Andrew Bailey and his fellow members make their decision on whether to raise rates. Another hot print could cement the fate of another few rate hikes, and see mortgage rates jump to fresh highs, causing another round of turmoil. However, a cooler-than-expected print could see the central bank opt to hold rates steady. It’s worth noting that two members had voted to not hike in the last meeting, as the full impact of rate hikes is yet to be fully felt by the UK economy given the lagged effect of monetary policy. Even so, the Bank of England will most likely hike rates by another 25bps if CPI inflation comes in around consensus estimates of 8.5%, as they face increasing amounts of pressure from politicians to get inflation back down to their 2% target.”
