Today’s announcement from the ONS that UK CPI has fallen to 3.9% year on year, has managed to surprise markets and analysts to the positive, hitting a two year low. Consensus was that the rate would come in at around 4.3%, falling from 4.6% last month.
So what does this latest fall mean for investment markets and for investment managers? What does it mean for the outlook for interest rates – will we see cuts sooner than expected? Experts have been sharing their views with us today as follows:
UK inflation continues a slow descent into the new year – Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services comments:
“This morning’s decelerated increase in headline CPI inflation confirms inflation’s slow-paced downturn during November. This was also evidenced at last week’s Monetary Policy Committee (MPC) meeting, where the base rate was kept at 5.25%, a 15-year high, with no indication of preparedness for a rate cut anytime soon.
Petrol prices dipped by 2.1% over the course of November, contributing to the overall decrease in the headline inflation. However, other figures, including food and clothing prices, continued to prove more stubborn, causing hardship for many families in the lead-up to the festive period.
More encouragingly for both households and the MPC, service sector prices are gradually easing. As the new year looms over the horizon, the Bank’s predictions indicate a flatlining economy for much of 2024, but no worse. Subdued economic expectations bear testimony to the Bank’s primary responsibility to drive inflation sustainably to target.”
Richard Carter, head of fixed interest research at Quilter Cheviot comments:
“Comparative to last year, there has recently been a sense of cautious optimism in the air and this morning’s inflation figure of 3.9% adds to this. The Bank of England now certainly faces a less daunting task in steering inflation back to its 2% target next year, without necessitating a deep recession.
Despite today’s drop, the broader economic picture remains complex, marred by stagnation and subdued growth prospects.
The year 2023 has been marked by economic inertia, a narrative underscored by the recent Office for National Statistics report, revealing a 0.3% contraction in GDP between September and October. This stagnation, leaving the output no higher than it was in January, paints a picture of an economy struggling to rebound from a series of unprecedented challenges.
Despite these challenges, this further decline in the pace at which prices are rising offers a glimmer of relief for households grappling with rising living costs. Yet it has not translated into robust economic activity. Key sectors like IT, financial services and retail have seen a dip in output since the start of the year, indicating an economy that is yet to find its footing.
The pressures are manifold – from the cost of living crisis, volatile energy markets, Brexit aftershocks, to enduring productivity issues. These factors have collectively dampened economic prospects and consumer confidence. Households continue to struggle with soaring food prices and wages, adjusted for inflation, barely keeping pace. However, positively notably transport, recreation and culture, and food and non-alcoholic beverages prices have reduced easing inflation.
The rental and mortgage markets are another area of concern, with record-high rental growth and although mortgage rates are softening they have piled additional financial strain on households.
While the UK’s economic performance mirrors the broader European trend, it starkly contrasts with the resilience shown by the US economy. Looking ahead, forecasts for 2024 remain muted, with the Bank of England projecting a continuation of this stagnant growth phase.
But while things have been bleak for some time, signs of recovery are emerging, with wages finally outpacing inflation and consumer confidence showing early signs of recovery and this morning’s relatively sizable drop in inflation. This modest rebound, in light of the myriad challenges faced this year, suggests a resilience in the UK economy that shouldn’t be underestimated. While the economy may not have achieved the growth anticipated, its ability to avoid a deep recession amidst such turbulent times is noteworthy but whether this can continue into next year is yet to be seen.”
Derrick Dunne, CEO of YOU Asset Management, commented: “Inflation is sliding faster than most people had expected, which will ultimately lead to questions about if – or when – the Bank of England should look to start cutting interest rates cuts.
Make no mistake, this reading is a major surprise. Many analysts had expected CPI to fall from 4.6% to between 4% and 4.4%.
But while this is a very welcome fall in inflation, we believe that the Bank of England will not see it as a signal to cut rates – not yet at least.
Yes, the medicine seems to be working, but inflation remains nearly twice the Bank’s long-term target, and so it will want to get the job finished before it contemplates cutting rates.
On top of that, the data is mixed and doesn’t clearly point towards higher interest rates hobbling the economy. The economy contracted in October, but consumer spending remains robust and the PMI figures from December shows an expansion in activity from the manufacturing and services sectors.
If we had to hang our hats on it, we think the Bank of England won’t even consider lowering rates until the second half of the year and, even then, only if inflation has fallen sufficiently and the economy needs a boost.
Anyone concerned about the impact on their investments should seek professional financial advice.”
Commenting on what today’s inflation data might mean for interest rates, Rob Morgan, Chief Investment Analyst at Charles Stanley, said:
“Although price pressures show clear signs of easing and the UK economy teeters on the edge of recession, there is a risk the ‘easy wins’ on inflation are behind us, so in the near term the BoE will still lean towards keeping rates in restrictive territory. Just as squeezing the last bits of toothpaste out of the tube is more difficult, squeezing the remnants of unwanted inflation out of the system can be tricky, so it needs to maintain restrictive interest rates for a while longer.
“Given inflation numbers are on a firmly downward trajectory and the weaker signals now coming from the economy, attention is now laser focused on when the first interest rate cuts might arrive. Indeed, markets have already moved significantly to price a handful of them in 2024, which ironically stands to bring forward some of the effects and make the Bank’s job a bit more difficult heading into the new year.
“Alongside a tight jobs market, the cheaper borrowing now appearing translates to less financial stress and higher demand, which could make it harder to keep a lid on price rises going forward. We can therefore expect the Bank to continue to talk tough as it pushes back on the view that price rises are well under control and its job is close to finished. Overall, it’s likely interest rates will remain in restrictive territory for most of 2024, but an initial cut in the second or third quarter is a strong possibility.”
Steve Clayton, head of equity funds, Hargreaves Lansdown said:
“Santa must think Rishi Sunak has been a good boy this year, because he’s just delivered the best Christmas present the beleaguered Prime Minister could have hoped for. UK inflation slowed in November to 3.9%, from 4.6% the month before. That’s a much bigger drop than the 4.3% outcome that most economists were predicting. Within the mix, food price inflation dropped back into single digits for the first time since June 2022. The overall drop was led by food, leisure and energy prices rising more slowly. Core inflation, which excludes the more volatile components, also fell by a broadly similar pace, dropping to 5.1% from 5.7% previously.
Inevitably, speculation that the Bank of England will begin to lower interest rates in the first half of next year is rising. Sterling is falling this morning as its future support looks to be weakening if UK rates are going to be coming down. Gilts are expected to be well bid this morning as the market prices in a more benign inflationary outlook. Futures markets are predicting that UK stocks will be off to the races this morning, with a rise in the FTSE of approaching 1% indicated. At the risk of playing Scrooge, this sort of stuff can spin on a sixpence. A bad reading in December could wipe all of this euphoria out in a flash. Should we be concerned about this? Well, it all depends on the weather. If we get a bitter January, then energy prices could quickly head higher. Time will tell.
Quantitative Easing was supposed to have prevented the world from descending into a deflationary maelstrom after the Global Financial Crisis of 2008/09. It involved central banks buying vast quantities of government and commercial debts to support the banking sector by capping rates and yields whilst injecting liquidity. No-one can really measure its impact; the only certainty was that a lot of money was printed to pay for this and that Governments found tame buyers for all the debts they were issuing at a time of weak economic conditions. Central banks ended up owning vast portfolios of bonds. The price of which has now tumbled due to the rise in interest rates seen over the last couple of years.
Michael Saunders, a renowned City economist, and one-time member of the Bank of England’s Monetary Policy Committee, has been looking at the cost of it all. It’s not small. In fact, for the price of a bond-buying scheme that might, or might not, have helped, you could have built HS2 with – even after its budget ballooned. So, something that might, or might not have done something, or a high-speed rail network. Ho hum.”
