Danni Hewson, head of financial analysis at AJ Bell, and Sarah Coles, head of personal finance at AJ Bell, examine the balancing act facing the Bank of England as it weighs persistent inflation risks against a weak economy and softer labour market.
Danni Hewson, AJ Bell head of financial analysis, comments:
“The majority of the Bank of England’s rate setters are expected to stay firmly on the fence during next week’s MPC meeting, keeping interest rates on hold at 3.75%.
“Even if next Wednesday’s inflation data shows the anticipated uptick in prices, a sluggish economy, a weak labour market and a boatload of uncertainty are expected to persuade all but the most hawkish members that the best move is no move at all – despite the ECB’s decision to take early action.
“At the last meeting only the Bank’s chief economist Huw Pill voted to raise interest rates, as the Bank laid out three potential scenarios for the UK economy depending on how long the conflict in the Middle East lasts and how quickly the world adapts.
“The price of Brent crude has remained under $100 a barrel since late May, despite the ongoing blockade of the Strait of Hormuz, and a recent Bank of England survey found the percentage of UK businesses expecting they will have to raise prices in response to the energy crisis has been scaled back in recent weeks.
“Compared to the last energy shock, the current situation feels markedly different. Gas prices haven’t seen the same massive jumps which should help prevent the energy price cap rocketing up to painfully high levels.
“And while the ‘transitory’ narrative quickly became out of date the last time central bankers had to deal with rising prices, the economic backdrop has changed significantly. There is a looser labour market now which is expected to keep wage increases in check and prevent some of the second-round inflation effects the Bank will seek to counter.
“That’s not to say households won’t feel the squeeze, especially as we get into the back half of the year when temperatures fall and the nights draw in. While inflation isn’t expected to get anywhere near the double digits of 2023, many people are still struggling to fund their day-to-day lives.
“Unlike in Europe where the ECB had relaxed monetary policy more quickly, the base rate in the UK is already pretty restrictive – at 3.75% it’s higher than it was in January 2023 when CPI hit 10%. Markets are still pricing in one or two quarter percentage point hikes later in the year, but that could change if a deal to end the conflict can be struck quickly.”
“How MPC members vote and whether more join the hike camp will be an important indicator of what’s to come. Rate setters will be under intense pressure to maintain a balance to prevent inflation staying higher for longer while being careful not to nudge the already fragile UK economy into a technical recession.
“Confidence is crucial and how the Bank frames its message will make a difference to how households and businesses feel about their own outlook.”
Mortgage rates fall as competition heats up in savings market
Sarah Coles, head of personal finance at AJ Bell, comments:
“The second half of May saw more optimism over a potential peace deal in the Middle East, pushing the oil price down, lowering rate expectations and cutting swap rates. The market is now pricing in a rate rise in September, and another in either December or February, but it’s a far cry from the early stages of the Iran war, when it was expecting as many as four hikes by Christmas.
“The Bank of England is expected to sit on its hands for a while longer, but the mortgage market isn’t hanging about. Fixed rates have fallen very slightly over the past month, and this week we’ve seen movement in some of the cheapest deals, as several of the big banks cut rates.”
“If you’re in the market for a remortgage, or you’re planning a move, it’s worth taking advantage of deals while they last. The progress of peace talks has been unpredictable, so there’s no guarantee that the optimism will endure.
“Competition in the savings market is boosting the best rates on easy access, so savers can get deals offering as much as 5% again. Unfortunately, some deals on the higher end have short-term bonuses built in, so you’ll need to be prepared to switch again soon, but rate chasers can cash in.
“Providers jostling for the top spot have also seen fixed rate savings deals nudge upwards. Aside from a handful of easy access deals with strings attached, you’re now getting better rewarded for tying your money up, with one-year deals offering as much as 4.85%. If you don’t need some of your savings for a specific period, it could be well worth considering a fix. Some of the strongest deals are only available for short periods, so anyone tempted will need to get their skates on.”
