The decision to freeze the Bank rate at 5.25% yesterday feels like a watershed to me. We’ve now hit peak interest rates. From here, the only way is down. So why is Andrew Bailey pretending otherwise?
After 14 successive hikes between December 2021 and August 2023, the BoE’s work is done.
It now needs to allow time for monetary tightening to do its work of squeezing the economy and suppressing inflation.
The Bank expects inflation to fall to around 4.5% this year, comfortably below Rishi Sunak’s 5% target. It will slide towards its 2% target next year.
It also predicts the economy will grow by just 0.5% this year and won’t grow at all in 2024. So why hike again? Why?
Repeatedly driving up borrowing costs will do nothing to stop what’s really driving inflation, which is higher imported energy and food costs.
The only threat is if the Israel-Hamas conflict spreads and the oil price rockets to $150 a barrel. Today it is $85 a barrel. With storage tanks full, it could fall further.
I reckon inflation will soon start to subside much faster than markets expect.
October’s consumer price inflation figure is published on November 15. If it falls from 6.7% in September to below 5%, the mood will change rapidly.
Inflation looks set to plunge across Europe. Germany’s headline inflation should hit just 2.8% in January and 1.8% in March. While I would expect UK inflation to stay higher, it will follow the same trajectory.
Banks and building societies are already gearing up for peak interest rates, by slashing both their savings and mortgage rates.
If I had some cash to tuck away, I’d be locking into a best buy fixed-rate bond today. If I were taking out a mortgage, I would go for a variable rate.
Bailey was slow to react to the inflation shock two years ago, claiming rising prices were “transitory”. He would be tempting fate to claim his policy is working. Yet in my view, unless the Middle East explodes, or we get some other nightmarish event, inflation and interest rates will fall next year at speed.
