Interactive Investor

Don’t expect UK interest rates to fall in 2024

As Bank of England policymakers decide their next move on domestic borrowing costs, we look at the possible outcomes from this week’s meeting and what might happen to rates over the next year and beyond.

19th September 2023 14:39

by Graeme Evans from interactive investor

Share on

UK interest rates montage 600

A protracted peak for interest rates is this week set to counter any relief that the Bank of England and other central banks appear to be near the end of their tightening cycles.

Traders are increasingly betting that global borrowing costs will stay at elevated levels throughout 2024, fuelled by stubborn inflation pressures and recent spike in oil prices.

The message that rates will stay in restrictive territory for longer than previously hoped is likely to be reinforced on Thursday when the Bank of England hikes interest rates for the 15th meeting in a row, by 0.25% to 5.5%.

Wage growth and services inflation, both of which have been higher than the Bank forecast back in August, are likely to necessitate the latest increase. Tomorrow’s inflation print, which is also likely to show an increase to 7.1%, will also influence the decision.

However, the lagged impact of interest rate rises means policymakers are likely to believe they are at the point where they can pause rate rises from November’s meeting onwards.

Recent comments suggest that senior officials at Threadneedle Street think that keeping rates higher for longer will be an adequate substitute for further rate rises.

At a recent conference in South Africa, chief economist Huw Pill said he favoured the Table Mountain over the Matterhorn as his route to getting inflation back to 2%.

And governor Andrew Bailey told MPs in early September that “we have moved from a period when it seemed clear to me that rates needed to rise going forwards”.

Their strategy will likely depend on wage growth slowing from 8.5% in July to the 3%-3.5% that would be consistent with the Bank’s 2% inflation target.

Capital Economics has pencilled in a first rate cut in November 2024 but believes the UK’s tighter labour market suggests that core inflation will take longer to fall back to the 2% target than in the US and the eurozone.

The consultancy added: “As inflation pressures are likely to ease only slowly, we suspect that the MPC will keep rates at their peak for a little over a year.

“That would be longer than the average 10-month gap since 1997 between the last rate hike and first rate cut.”

Bank of America, meanwhile, thinks that this week’s 0.25% rise will be the final one in the cycle, but with no rate cuts predicted until 2025. Economists at ING have not ruled out a pause this week in a scenario where the Bank hints strongly that it could hike again in November.

The Bank of England’s meeting comes a day after the Federal Reserve is expected to leave its federal funds rate unchanged for the second meeting in a row at 5.5%.

However, Deutsche Bank pointed out today that pricing for the Fed’s June meeting last night hit a new high for this cycle at 5.16%, suggesting that investors don’t expect much in the way of cuts anytime soon.

This follows the relentless rise in oil prices over recent weeks, with Brent crude this morning above $95 a barrel after a decline in US shale output added to supply concerns caused by recent Saudi Arabia production cuts.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox