Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THINGS got a little tougher for UK borrowers today following the Bank of England’s latest rise in interest rates.
The rise from 0.75% to 1% means the Bank Rate is now at its highest level since 2009, but few expect things to stop here. Economists are factoring in rates hitting 2% by the time the year is out.
UK interest rates rise to 1%
Source: Bank of England, May 2022
The Bank is acting, of course, in the hope it can stem rampant inflation, now running at 7%. Price rises have been driven largely by soaring energy and other commodity costs, as well as a global squeeze on supply chains - factors which will not be moved by reducing demand through higher rates. But rate-setters are clearly worried that inflation could take on a momentum of its own if wages continue to move higher and create yet more demand to chase the limited supply.
The path the Bank is trying to tread is narrow because recent data shows the UK economy is running out of steam and taking demand out now risks halting growth altogether. The most recent quarter for which GDP data is available showed UK plc growing by 1.3% between October and December, but that is expected to fall next week when figures for the first quarter of 2022 are published.
The Bank is now forecasting a slowdown in growth next year and the risk of recession is now very real.
Inflation has risen so rapidly, and in areas that households struggle to avoid such as energy, food and fuel, that predicting the impact on overall economic activity is difficult. Many are already having to alter their spending decisions to cut back on discretionary items. This creates the risk that consumer sentiment will turn much more negative in the months ahead.
The one arm of the economy holding that back for now is the jobs market, where wages are rising - albeit by less than prices - unemployment is low and vacancies are at record highs. This has been helped by the so-called ‘great resignation’ during the pandemic, as well as factors like Brexit which has stemmed the supply of labour. It’s meant that those in work have felt reasonably secure and willing to keep spending.
For the UK to tip over into recession would probably require that to change.
For investors in the UK the picture is not quite as bleak as the economic analysis suggests. Britain’s stock market has found itself in a relative sweet spot this year compared to other markets, notably the US. The large commodity, energy and financial companies that dominate in the UK tend to do best in an inflationary environment and, what’s more, they are likely to benefit from the relative weakness of the pound versus the dollar because they have become cheaper for foreign investors to buy.
This week’s interest rate moves add to that because the quarter point rise in the UK was less than the half-point rise enacted by the Federal Reserve, meaning the dollar is likely to strength further against sterling.
A feint silver lining amidst an otherwise difficult economic picture.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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