AXA Investment Managers believes UK interest rate hikes have reached their peak, after the Bank of England raised rates to 4.5%.
On 11 May 2023, the Monetary Policy Committee raised the rate for the 12th time in a row from 4.25% to 4.5%. Rates are at their highest level in almost 15 years as the Bank of England battles to slow inflation.
The Bank of England also raised its GDP outlook, forecasting growth at 0.25% for 2023 and 0.75% for 2024 and 2025, reflecting strong global growth, lower energy prices, a fiscal boost and stronger domestic demand. However, the Bank also raised its forecast path for inflation, now seeing inflation falling towards target by the end of 2024 and settling around 1% thereafter.
AXA said it believes the central bank has reached a peak of 4.5%, below market expectations for 4.75%. Its assertion follows a more balanced tone from Governor Andrew Bailey, who stated that the Committee had “no bias” and that further tightening in policy would only be necessary if further signs of inflation persisted.
David Page, Head of Macro Research at AXA Investment Manager, said: “With Bank Rate now standing at its highest level since 2008 and inflation still in double-digits, the question remains – have we reached a peak? We think so but as the Governor stressed this is fully data dependent.
“The BoE is also considering the lags to the 4.40% increase in Bank Rate it has implemented since December 2021. The Governor argued that changes to the structure of the UK mortgage market means that the pass through of tightening to the household sector was likely slower than in previous cycles. Coupled with our expectations for a more obvious easing in the labour market by then and global uncertainty surrounding the passage of the US debt ceiling, we think that, on balance, Bank Rate at 4.50% will prove to be a peak.”
However, AXA said in light of the Bank’s growth upgrades and its ongoing doubts about second-round inflation effects, it has changed its outlook for rates going forward. While it had previously forecast a rate cut before year-end, it now expects the first cut to occur in February 2024. It then expects the Bank to ease rates from 4.5% to 3.5% by the end of next year.
Nigel Green, CEO and founder of deVere Group, called the latest rate hike a “failure”, stating that UK households and businesses are being punished by the central bank.
He says: “The Bank of England has failed households and businesses across the UK who are continuing to be punished by the central bank’s failings. They failed with their inaction at the start, passively standing by far too long last year when the UK was first coming out of Covid lockdowns and prices were already starting to surge. They’re failing again now with the latest rate hike.”
Green said the Bank of England is intent on driving the UK economy into deeper recession by continuing to make borrowing more expensive, leading to a reduction in spending and investment.
He added: “To add insult to injury, central bank monetary policy is notoriously slow to take effect. It is said that changes in interest rates take a year to 18 months to feed themselves into the broader economy. Given the many interest rate hikes over the last 18 months, it would be astonishing if we did not see a marked slowdown in employment growth and demand over the coming months.
“The announcement of another hike is a further blow for UK households and businesses who are the ones left struggling to deal with decisions made by the Bank of England, which is still failing to curb the fastest inflation of any major economy.”
