Industry expects tightening cycle to end soon following Bank of England hike

Hussain Mehdi, macro and investment strategist for HSBC Global Asset Management, said that despite a “still soggy growth outlook,” the central bank followed through with the hike due to concerns over persistent inflation and a tight labour market.

Medhi added that with “policy in restrictive territory and activity indicators deteriorating,” he believed that interest rates were now near their peak.

Brian Nick, chief investment strategist at Nuveen, agreed, saying the bank had done “what was expected of it”.

He now expected the bank to be “winding down its rate hikes over the next meeting or two,” with smaller hikes in March and potentially May.

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Nick also noted that the pound had dropped and UK equities had rallied following the announcement, indicating that investors may have been anticipating more forceful language from governor Andrew Bailey at the press conference after the decision.

William Marshall, CIO of Hymans Robertson Investment Services, added there was a clear contrast between the bank’s 50bps hike and the 25bps hike made by the Federal Reserve yesterday.

He said: “This reflects the relative aggressiveness of their policies during 2022. As a consequence, the BoE was left with more work to do this year.”

However, Marshall agreed that the Bank of England was “nearing the end of this tightening cycle”.

Marcus Brookes, CIO of Quilter Investors, agreed, stating that the bank “can only wish” it was in the same position as the Fed on slowing rate hikes.

Forecasting

David Goebel, investment strategist at Evelyn Partners, noted that the bank’s economic forecast had seen an upgrade to growth expectations with falling energy prices and higher-than-expected GDP data (0.1% in November compared to expectations of -0.2%).

This has led to the bank improving its growth expectations for 2023 to -0.5% from its previous estimate of -1.5% in November, significantly downgrading the severity and length of expected recession.

Goebel added that the new forecasts meant that the economy is now “set to contract by almost 1% over five quarters, rather than 2.9% over eight quarters”.

However, inflationary pressures are still severe, with December seeing a 10.5% rise in prices, with the core measure (excluding food and energy) proving “slightly stickier than expected” at 6.3%.

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Goebel also pointed to the softer tone in the bank’s MPC report, as it said that if inflation persisted, “then further tightening in monetary policy would be required,” which omitted the word ‘forcefully’ as it had included in previous statements.

He noted that expectations had now settled on a peak of about 4.5% in June or August, well below the 5.25% expectations that the market held in November.

However, Hymans Robertson’s Marshall said that while the improving growth forecast represented “some green shoots of positivity,” inflation still remained “stubbornly high” and the bank may still allow a “shallow but prolonger recession” in order to tame it.

He took a more contrarian view than other experts: “Calling this the beginning of the end of rate hikes still feels a little premature.”

Brookes also drew attention to the prediction from the International Monetary Fund that the UK will be the only ‘advanced economy’ to contract this year, combined with the cost of living crisis, to suggest the bank may feel that it “cannot go too much further”.

HSBC’s Medhi added that the “big question” now was the speed at which the bank can reverse course on rates, warning of a “long period of restrictive policy”.

He concluded: “We retain a cautious view on UK and European stocks in the face of downside risks to GDP and corporate earnings growth relative to consensus expectations and believe the recent rally to be unsustainable.”