Markets now think we won’t get a UK rate cut this year says AJ Bell’s Laith Khalaf (pictured), as he shares his latest economic analysis with us.
The focus for tomorrow’s MPC meeting will be on voting patterns and Quantitative Tightening (QT) – the cost of QT is effectively the taxpayer still paying for the cost of the clean up after the financial crisis
With the Fed expected to announce a US interest rate cut later this evening, Rachel Reeves may be looking across the Atlantic for some help says Laith Khalaf, head of investment analysis at AJ Bell, as he reflects on what all this means for the markets and for gilts commenting:
“The UK has an inflation problem which is keeping the Bank of England in cautious mode on interest rates. While inflation is nowhere near as bad as it was, prices are still rising at an uncomfortable pace, so there is waning expectation of a rate cut at any point this year. As things stand, the market currently only assigns a one in three chance to the possibility of an interest rate cut by the end of the year (based on Refinitiv data).
“Last month the Bank cut base rate, but it was a half-hearted decision, seeing as four of the nine members of the voting committee wanted to keep things as they were. So there will be some intrigue this time around as to whether a greater measure of consensus is achieved about the appropriate level for interest rates. If one of the more hawkish members votes for a hike, that would really put the cat amongst the pigeons. That seems highly unlikely, but not totally unthinkable.
“We should also get an update on the Bank’s plans for QT over the coming year. Economists are expecting the pace of reduction in gilts held by the Bank of England to slow from £100 billion in the last 12 months to £72 billion in the coming year. If the Bank comes out with a figure substantially wide of that mark, there could be a reaction in the gilt market.
“The gilts held by the Bank of England have turned from making a tidy profit for the government into a costly expense now interest rates have risen and the Quantitative Easing (QE) programme is being slowly unwound. In essence, we are now paying for the cost of the extraordinary stimulus provided by the Bank of England in the wake of the financial crisis, which started over 16 years and eight chancellors ago. Rachel Reeves is in the unfortunate position of being the mug now holding the enormous bill to present to the taxpayer.
“Along with a myriad of other potential tax rises rumoured ahead of the Budget, the IPPR has called for a new bank levy, and a renewed focus on the continued cost of cleaning up the 2008 banking crisis could open up old wounds and make this more politically palatable. Of course, current bank executives and shareholders are now much changed from those who steered us towards the global financial crisis and may feel additional taxes are unjust. Then again, no new taxes are likely to win any plaudits for fairness, wherever they may fall.
“The chancellor has opted for a late Budget this year, perhaps hoping that some better economic data shows up. The fact markets are now not expecting a rate cut from the Bank of England this year might be a fly in the ointment on that front. But Reeves may actually be looking across the Atlantic for some much needed help. If the Fed cuts rates in the US as we head towards the end of the year, that should help lower yields in the gilt market, providing the chancellor with some respite in what looks like being a brutal reckoning. Perhaps she should join the presidential chorus of calling for a big cut.”
