HAVE UK INTEREST RATES PEAKED?

01.03.2023 Today Bank of England Governor Andrew Bailey suggested there was no pressing need for further interest rate rises. Below we look at whether UK interest rates have peaked and the investment implications of this.

Headline CPI (Consumer Price Index) inflation is currently 10.1% on an annual basis. However, inflation is expected to fall away fast this year. Dramatic falls in the price of wholesale gas are expected to put strong downward pressure on energy price inflation. Furthermore, a normalisation of global supply chains should see the price of manufactured goods prices fall back as well.

A good measure of the extent to which inflationary pressures are moderating are the Bank of England’s own projections for CPI inflation. On the basis that interest rates stay at four percent it sees annual inflation at 0.8 percent in two years and just 0.2 percent in three years. So, we think that there is a good chance that UK interest rates have peaked.

One way to exploit the fact that interest rates are currently at a fifteen years high is to buy long maturity bonds. Bonds are multi-year loans that pay a pre-agreed interest rate with the capital returned in full at the end of the period. Purchasing long maturity bonds effectively locks in today’s high interest rates over the lifetime of the bond. Another asset class that is attractive at present are property shares. Dividend yields on good quality property companies are currently between five and seven percent.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin