Katy's outlook for UK inflation and interest rates
Tuesday 11th April 2023
Katy Baxter
With UK inflation higher than expected and interest rates now at 4.25% what's ahead? The Bank of England's latest 0.25% increase to UK interest rates takes them to 4.25%. Many hope it will be the last hike of the year but with inflationary pressures persisting, Ian our Chief Operating Officer asked Katy for her outlook on inflation and interest rates.
Were you surprised Katy by the BoE's decision?
Not really Ian, although 2 out of the 9 members of the Monetary Policy Committee didn't want to increase rates. Whilst the collapse of Silicon Valley Bank and concerns over Credit Suisse caused some more volatility in the markets, the impact on the UK banking system was limited. The measures announced in the Spring Budget also added to medium-term inflationary pressures. The Chancellor is deploying £21 billion in spending over the next fiscal year, which the OBR (Office for Budget Responsibility) estimates might add around 0.3% to GDP growth. This new 'fiscal firepower' demands a proportionate monetary response in the form of the 0.25% hike we've seen.
Do you think the stronger economic data means the UK will avoid a recession?
From my reading recently and speaking to fund managers on our panel it suggests the recession being short and shallow. The good news is that business sentiment has improved, with future business expectations in the services sector at its highest level since May 2022. There are also signs that the labour market is keeping robust. The unemployment rate remains at 3.7% - slightly lower than the BoE was expecting. Meanwhile the number of open vacancies is well above pre-pandemic levels and filling vacancies for many roles is still proving difficult.
Despite this we don't really know the full impact of all the recent rate increases will have on businesses and consumers so there could be some more pain to come.
Inflation data for February was higher than expected. What's your outlook Katy overall?
Inflation increased to 10.4% in the 12 months to February, up from 10.1% in January. This was 0.5% higher than the BoE expected. Although fuel prices continued to fall, costs in other areas rose notably - food prices mainly, around the well-publicised salad shortages. CPI which strips out price changes for energy and food - as these are more volatile - was also significantly higher at 6.2% (the Bank's forecast being 5.8%). The outlook for inflation is still a fast deceleration from April onwards as we see the continuing fall in fuel costs reflected in the annual figure. Overall, I think that headline inflation will still sit above 3% by the end of the year but this will be significantly lower than what we've recently been experiencing and should be welcomed by our clients.
Do you think Katy that we've reached a peak in interest rates?
The BoE do not have an easy job when having to raise interest rates to manage high inflation and at the same time not push the economy into a recession or cause instability in the markets - remember the recent mini-budget implications caused by Truss and Kwarteng.
Because the BoE has raised rates 11 times over as many consecutive months I think caution will be exercised to see how these feed into the economy and the impact they have. For now, I think the hike has drawn to a close at 4.25%.