Case for modest UK interest rate hike becomes stronger

September 23, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

SUMMARY

In light of rising UK inflation, it is possible that the first Bank of England interest rate rise may take place before the end of the existing government bond purchase programme in December 2021. However, we believe a move in 2022 is more likely.

At its meeting on Thursday, the Bank of England kept its deposit rate at 0.1% on a unanimous vote and left its asset purchase programme unchanged at £875 billion on a 7-2 vote. The two dissenters were seeking a reduction to £840 billion.

However, the UK central bank highlighted additional concern over rising inflation, predicting that consumer prices will peak at over 4% in the coming months, higher than their 2% target rate.

Consequently, markets’ expectations of an interest-rate hike have been brought forward. UK assets were broadly steady after the announcement and continue to look well supported. We remain overweight UK equities.

The economic recovery is supporting earnings, low interest rates are supporting equity valuation and the wide yield gap with fixed income is encouraging inflows.

The first interest-rate rise may take place in December. However, a key short-term variable is unemployment, as the furlough scheme ends at the end of September.

This is likely to mean that there will not be a rate hike until early next year. Citi expects the deposit rate to move from 0.1% to 0.5% by May 2022, and 1.25% by early 2024.

Europe Strategy Bulletin (PDF 345.18 KB)

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