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If the BoE do not control inflation, a recession will occur anyway.

  • Monday, June 5, 2023

Headline CPI inflation fell from 10.1% in March to 8.7% in April, but this fall was less than the BoE had expected. Meanwhile the figures for core inflation which exclude the currently expensive heating and food costs which are considered imported inflation, showed a monthly rise from 6.2% to 6.8% pa. Core inflation is seen as domestic inflation.

Analysts are now expecting that the BoE will have to continue to rise interest rates to a new peak of 5.5% up from the current 4.5%. These rises are expected over the next 3 meetings of the Monetary Policy Committee in June, August, and September.

Markets are becoming concerned about this inflationary data, to the extent that pricing has been moving significantly. For this reason, Jeremy Hunt made it clear that the control of inflation was the governments priority even if this means higher interest rates that cause recession.

On the back of these figures and expectations, the yields on UK government gilts increased. The 2-year gilt rate, which is the most sensitive to short term interest rates, increased to 4.48%. The 10-year rate to 4.33% and the 20-year rate to 4.63%.

Some leading mortgage providers simultaneously announced increases in their variable and fixed mortgage rates. Raising mortgage costs will have an impact on consumer spending and confidence.

Economist are now warning of a likelihood of the UK falling into recession in Q1 2024, which so far, the UK economy has avoided. The strength of the economy is a problem in that the strong labour market is resulting in rising wages. Wage growth is around 6% which is double the rate that the BoE consider consistent with their target of 2% inflation.

Economists are of a view that a 5.5% rate of interest could trigger new economic stress as we have already witnessed. The BoE will have to choose between inflation or a recession. Jeremy Hunt has indicated already the preference. However, if the BoE do not control inflation a recession will occur anyway.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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