Interest rates next change ‘far more likely down than up’
Interest rates are set to be held on Thursday in what some analysts believe could be a split decision as two Bank of England officials could back a 25 basis point hike.
The Bank’s Monetary Policy Committee is widely expected to leave interest rates unchanged at 3.75 per cent, though some members could back a hike to combat sky-high inflation expectations and subdue price pressures as soon as possible.
But economists have suggested that the Bank’s next move on interest rates is likely to be a cut rather than a hike, with the MPC set to return to easing monetary policy once the Iran war’s effects on the UK economy have already been felt by households and businesses.
Martin Beck, chief economist at WPI Strategy, said the May reading showing inflation had been lower than expected would ease concerns about prices spiralling across the Bank.
He pointed out the official reading of 2.8 per cent in CPI inflation was far below a 3.3 per cent forecast by the Bank, taking the “heat out of speculation about further rate rises”.
“With price pressures undershooting the Bank’s expectations, the labour market weakening, pay growth slowing sharply and energy risks looking less threatening than feared, an interest rate hold this week now looks all but certain,” Beck said.
The renewed sense of hope over price pressures follows a peace deal being struck between the US and Iran, as well as a commitment to re-open the Strait of Hormuz to international shipping carrying critical goods such as oil and fertilisers.
The Brent Crude oil price has now fallen below $78 per barrel despite a previous high of $114 per barrel. UK natural gas prices are also around the level they were in January of this year before the Iran war broke out.
Beck added: “The next move in rates is far more likely to be down than up.”
Beck’s view is consistent that of other City analysts, who believe markets are overpricing the risks of elevated interest rates given two-year gilt yields were at 4.13 per cent, which represents at least one 25 basis point hike.
Capital Economics’ Paul Dales said fresh price growth data on Wednesday made the consultancy “more confident” that the Bank would hold off hiking interest rates this year before cutting to three per cent next year.
Other City firms to say that the Bank’s MPC is likelier to cut rates than hike them include Fitch Ratings, Morgan Stanley and Peel Hunt, which said that there could be a reduction in interest rates as soon as this year.
The investment bank’s chief economist Kallum Pickering said lower aggregate demand and tighter financial conditions across markets “reduces the risk of a prolonged inflation spiral”.