There’s been a big shift in monetary policy expectations, which suggests we are now pretty close to the top of the interest rate cycle in the UK.
Markets are currently pricing in a ‘one and done’ hike for the Bank of England, with a peak of 4.25% for the UK’s base rate.
There is considerable uncertainty about the precise timing of the remaining interest hike that’s been pencilled in though, with a 50% chance placed on it happening at the forthcoming March meeting.
That means the market is pricing in a 50% chance we won’t get an interest rate rise in March, which would be the first time without a hike since November 2021.
There are a number of factors which have led to a drop off in interest rate expectations. The failure of SVB, and the more recent travails of Credit Suisse, have created widespread concern that something is about to break as a result of tighter monetary policy.
At the same time inflation is receding, and is now forecast by the OBR to fall to 2.9% at the end of this year.
There is also of course a limit to how much interest rates can rise, and after 10 consecutive hikes in the space of just over one year, it’s little wonder that everyone is now curious about when the music is going to stop.
Monetary policy takes a long time to filter through into the real economy, and so we are only now just beginning to see some of the effects of the tightening cycle of the last year or so. The failure of SVB is one such example.
But there are also four million UK households who are forecast to face higher mortgage payments this year, which will clearly impact on their personal finances, and on the wider economy as a result of their restrained spending.
Energy price falls may well be in the pipeline, but high interest rates are picking up the baton of putting pressure on the finances of both consumers and businesses.
Laith Khalaf is head of investment analysis at AJ Bell
