Despite the recent dip in UK inflation, the Bank of England (BoE) is expected to hike interest rates again next month, according to Nigel Green, CEO of deVere Group, one of the globe’s leading independent financial advisory, asset management, and fintech organisations.
This forecast follows the latest data showing that UK inflation dipped to 7.9% in June from 8.7% in May.
Green asserts, “Despite the data indicating that the fight against inflation in the UK is seeing results, we anticipate that the Bank of England will maintain its aggressive interest rate increasing strategy at the monetary policy meeting on 1st August.”
He argues that even though the consumer price index dropped to 7.9% last month, largely due to decreased petrol prices and a slower growth rate for food, drinks, and other necessities, central bank officials will likely stress that more needs to be done.
According to Green, “We are of the view that the Bank will emphasise that while inflation is indeed decreasing, it’s doing so extremely gradually. Inflation remains obstinately high – the highest in the G7 – and significantly off the 2% target.”
He adds that central bank officials are likely to point out that prices are still far too high and are escalating faster than they have previously. They may also highlight strong wage growth recorded in the three months leading up to May.
“Considering these factors, we expect the Bank of England to raise interest rates for the 14th consecutive time at its upcoming policy meeting – and it wouldn’t surprise us if we saw another consecutive 50 basis point hike,” Green warns.
Such an interest rate increase could exacerbate difficulties for households, homeowners, and businesses. Higher interest rates lead to greater borrowing costs, potentially causing mortgage payments to rise and household spending and overall economic activity to decrease due to increased loan repayments.
Businesses dependent on borrowing could face heightened interest expenses, which may affect profitability and expansion or investment capabilities. Additionally, the dampening of consumer spending caused by higher interest rates could impact businesses reliant on consumer demand.
The value of current fixed-income investments, such as bonds, typically suffers from hiked interest rates, as new issuances promise higher returns. Historically, higher rates have also provoked stock market uncertainty and heightened volatility, leading investors to reconsider their portfolios. Interest rate-sensitive sectors, such as housing, automotive, and financial sectors, may experience a higher impact than others.
In conclusion, Green maintains his stance: “We hold the view that while the fight against inflation appears to be succeeding, with the lowest reading in 16 months, the Bank of England is extremely unlikely to deviate from its current rate hiking trajectory for the time being.”