WHERE NEXT FOR UK INTEREST RATES?

17.05.2023 Following the latest Bank of England inflation report we look below at the outlook for UK interest rates.

It has to be said that the Bank of England’s forecasts for the economy have been erratic to put it mildly over the last year. For example, it has gone from forecasting the longest recession on record in November 2022 to, six months later, expecting a modest economic expansion.

However, taking the latest report at face value it expects inflation to fall this year but at a slower pace than in February. The key driver of this is that food inflation is now expected to be much more persistent.

With inflation now only expected to return to two percent by 2025 the Bank of England is worried that higher wage settlements, facilitated by a tight labour market, will ‘lock-in’ higher rates of inflation. So, it looks like there will be another quarter of a percentage point rate hike in June and possibly one in August as well.

A pause from raising interest rates seems likely to be announced in the Summer. At that point inflation would be firmly on a downward trend. With inflationary pressures falling globally, and much of the impact of the UK’s rate rises yet to feed through to the economy, the Bank of England needs to be careful not to over tighten monetary policy.

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