Comments by Mike Riddell, Head of Macro Unconstrained at AllianzGI.
Key takeaways
- We expect the Bank of England (BoE) will hike by 0.25% to 5.25%, rather than 0.5% that was previously feared by markets.
- UK economic growth continues to falter. Higher mortgage rates are starting to weigh on the UK housing market where prices are falling by the most since 2009.
- We believe the BoE will be able to curb growth and drive down inflation. If it does so, the BoE should be in a position to cut rates next year.
At its last meeting, the BoE surprised markets with a 0.5% hike, but data released since then has given the Old Lady some breathing space. UK inflation data released in July showed a big downside surprise, a sharp reversal of the major upside surprises of the previous 4 months. Meanwhile, weak UK business and consumer confidence surveys released recently indicate that UK economic growth is faltering again. There is also clear evidence that higher mortgage rates are beginning to weigh on the housing market, where prices have now fallen by the most since 2009.
UK inflation remains uncomfortably high, and interest rates will surely continue to rise. But it’s more likely that the BoE will hike by 0.25% to 5.25%, rather than 0.5% that was feared by markets only a few weeks ago. Markets expect the bank rate to hit 5.75% by year end, which may well be right, but interest rates are expected to remain very elevated for years after too. if the BoE succeeds in killing growth and driving inflation lower, and we think they will succeed, then the BoE should be in a position to cut rates again next year. We think that gilts and index-linked gilts are now offering decent value, and for the first time in 18 months, we recently moved our portfolios to benefit from gilt prices rising.
