The decision to freeze bank rate at 5.25 percent feels like a watershed to me. We’ve now hit peak interest rates. From here, the only way is down. The question is when, not if. So why is Bailey pretending otherwise?
Yesterday’s rate freeze was good news. After 14 successive hikes between December 2021 and August 2023, the BoE’s work is done.
As I have argued repeatedly, it now needs to sit back and allow time for monetary tightening to do its work of squeezing the economy and suppressing inflation.
Any more rate hikes would be a disaster. We don’t need them.
The Bank expects inflation to fall to around 4.5 percent this year, comfortably below Rishi Sunak’s five percent target. It will slide towards its two percent target next year.
It also predicts that the UK economy will grow by just 0.5 percent 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 as a result, as the World Bank has warned.
That would obviously drive inflation back up put hiking base rates in response would be nonsense. It really won’t make any difference.
Today the oil price is fallng to $85 a barrel as the big regional players clearly don’t want the conflict to rage out of control. With storage tanks full, it could fall further.
I reckon we’re finally at a tipping point and 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 percent in September to below five percent, the mood will rapidly change.
That’s highly likely due to the baseline effect, as last autumn’s panic-fuelled oil and gas price surge drops out of the annual figures.
Inflation looks set to plunge across Europe. Germany’s headline inflation should hit just 2.8 percent in January and a meagre 1.8 percent in March. In France, inflation is predicted to be just 2.1 percent by February.
While I would expect UK inflation to stay higher than in Europe, but it will follow the same trajectory. Soon the clamour to cut rates will become intense.
READ MORE: Interest rates LIVE: Bank of England keeps 5.25% freeze despite calls for drop
Banks and building societies are already gearing up for peak interest rates, by slashing both their savings and mortgage rates.
They know what’s coming.
If I had some cash to tuck away, I’d be locking into a best buy fixed rate bond today before rates slide further.
If I was taking out a mortgage I would go for a variable rate, and expect to be paying less interest in a year’s time.
Bailey was disastrously slow to react to the looming inflation shock two years, claiming rising prices were “transitory” when they obviously were not. He would be tempting fate to claim that his policy is working, so continue to talks tough.
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. We’re at the beginning of the end. Finally.
