“The UK inflation reading for February is a bit like testing the temperature of a hot bath before a few more kettles of boiling water are poured in. Inflation has heated up yet again to 6.2%, slightly higher than predicted and more than triple the level of the bank’s target. This is before the commodity chaos unleashed by the invasion of Ukraine fully shows up in the figures, so the expectation is that with inflation becoming hotter, the Bank of England will try and turn on the cold taps by raising rates more assertively.
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Policymakers acted cautiously at the last meeting, only increasing rates by 0.25%, and although they won’t quite throw that caution to the wind, given concerns a major tightening could tip the economy into a downturn, they’ll be more inclined to keep up the pace of hikes, with some forecasts predicting interest rates will hit 2% in a year. That is still low on a historic basis, but the era of ultra cheap money looks well and truly behind us, and it’s going to be a necessary but difficult adjustment with so many consumers and businesses reliant on super-low rates of interest. Some measures to relieve the pain are expected to be administered in the UK, by Chancellor Rishi Sunak later in his Spring Statement, and these are likely to be targeted at the lowest earners, who bear the brunt of commodity prices rises. The expectation of a hotter CPI reading, and a knock on effect of higher rates had already pushed up yields on UK government debt, with 10 year gilt yields rising to above 1.7%, a level not reached since October 2018.
Getting A Handle On Inflation
The bulk of the increase in costs for consumers in the inflation snapshot came from higher energy bills and fuel prices, and there is no immediate end to that financial pain in sight with crude oil staying elevated, with Brent crude above $116 a barrel. However, a lid is being kept on gains for now with talks on trying to achieve an end to the devastating conflict in Ukraine, appearing to still be moving forward. It may be slow, step by step progress, according to Ukrainian President Zelensky, but any kind of improvement in the chances of a ceasefire is being welcomed by investors. Equity markets have risen with sentiment largely sanguine in the midst of the geopolitical turmoil, with the FTSE 100 rising on the open. Tech stocks in particular have stayed resilient, despite the interest rate hikes expected, which reduce the value of their future earnings, but it’s clear that many investors agree that trying to get a handle on inflation should be the top priority. All eyes will be on tomorrow’s meeting between President Biden and European leaders, where agreements to tighten the sanctions screw are expected to try and increase the pressure on Moscow to end the fighting.”
Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
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