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Our views 12 May 2023

Rate hikes and recession: will we see either in 2023?

5 min read

Following rate hikes last week for the US and eurozone, yesterday was the turn of the Bank of England (BoE).

At the meeting the Monetary Policy Committee (MPC) fully delivered on market expectations, raising rates from 4.25% to 4.50%; a largely consensus move by the committee, with just two dissenters, both voting to leave rates on hold.

The headlines will no doubt focus on the largest about-turn in growth forecasts since the MPC became independent. Quite simply, the MPC now expects the UK to avoid recession altogether, with growth expected to be 0.25% this year and 0.75% in 2024. Whilst that is undoubtedly positive news (albeit on conditional data which is potentially subject to frequent and significant revisions), it presents the MPC with challenges; the underlying level of growth still remains low, particularly given the level of base rates. But more importantly, with no recession now forecast, and a persistently tight labour market, where is the recession the economy ‘needs’ to bring inflation back to the Bank’s 2% target on a sustainable basis?

Furthermore, the BoE upgraded its inflation forecasts to 1.10% in two years’ time and 1.20% in three years’ time. These are of course below the Consumer Price Index target, but with the BoE stressing that the risks remain firmly to the upside, particularly in the short term, it is now becoming hard to see which pieces of economic data justify the market’s predicted path for base rates – notably that the BoE will start cutting rates later this year, reaching a neutral rate of 3.50% by the end of 2024. So in many respects today was about the BoE catching up to where economists and markets have been for much of the last few months. With no recession forecast, and inflation still high but rolling over, the market needs to focus on what the path for rates looks like beyond short-term terminal pricing.

Given the increased focus on data and increased variability in data outcomes versus market expectations, we believe that volatility in markets looks set to persist, continuing to provide a fertile hunting ground for active management.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.