Morning Brief – UK Interest Rates

Humphrey Percy
Chairman and Founder
Fri 4 Aug 2023

UK Interest Rates

As expected by 66% of economists polled, the Bank of England duly raised rates by 25bps; 34% anticipated a more draconian 50bp rise. Little or nothing is written these days about the Governor of the Bank of England being required to write to the Chancellor of the Exchequer to explain when the inflation rate is outside the target 2% each month. Presumably with inflation at 7.9% the Governor has photocopied a stack of those letters and simply inserts a fresh date each month. At present the market expectation is for UK interest rates to peak at 5.75% to 6% at the start of 2024 before resuming a gentle glide back down once again.

There are at least three problems with that scenario: firstly 3 million home owners will by then be renegotiating their mortgages as floating deals and fixed rate deals run off-they needless to say will be looking for an unrealistic steeper series of interest rate cuts after the 14 successive rises since 2021. Secondly 2024 will see an election and the Prime Minister has staked his own and his government’s reputation and its re-election prospects on successful economic management of the UK economy. Thirdly which leads on from the second point, inflation is still at 7.9% and both food (Russia and Ukraine) and energy prices (see below) are not looking helpful in getting that stubborn UK inflation down. 

So all in all the comfortable glide path downwards in UK interest rates looks to be some way off and the only certainty is that the Prime Minister will want to hold an election as late as possible in 2024.
GBP/USD 1.2700.

Oil Seesaw

West Texas Intermediate oil on NYMEX yesterday duly rose on the back of the Kingdom of Saudi Arabia announcing that it was going to keep its 1 million barrel per day output reduction in place and also that it left the option open to extend or increase that reduction thereby protecting their own revenues and oil profitability. Meanwhile in the USA the US government is running down the SPR or Strategic Petroleum Reserve in an attempt to cap the price of a gallon at the pumps. There can of course be only one winner in this uneven contest and it is not the USA which means that the only card left for the US government to play in this high stakes game with OPEC+ or more particularly Saudi Arabia is that of appealing to the oil producers’ better natures. Stand by for more shuttle diplomacy from Anthony Blinken as higher oil prices will undo the inflation reduction story.
EUR/USD 1.0940.

Golden Sofa?

If you simply must have one of these or possibly a mustache comb, do not look away but get involved in the auction of the contents of the house of Queen singer, Freddie Mercury where no less than 33,000 of such desirable items are up for sale.

Purple Rain

This day in 1984 pop star Prince set out on what turned out to be 24 consecutive weeks at Number One in the Billboard 200. The album went on to go Platinum….13 times over! Here is the title song:

I never meant to cause you any sorrow
I never meant to cause you any pain
I only wanted one time to see you laughing
I only wanted to see you
Laughing in the purple rain
Purple rain, purple rain
I only want to see you
Laughing in the purple rain

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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