What’s next for UK interest rates following the biggest hike in decades? We share our thoughts on the Bank of England’s guidance and outlook.

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What’s next for UK interest rates following the biggest hike in decades? We share our thoughts on the Bank of England’s guidance and outlook.

Market traders and mortgage holders were holding their breath on 3 November, waiting to see if the Bank of England (BoE) would act as expected. And it did – increasing interest rates by 0.75%, taking them to 3%. This marks the biggest hike in more than three decades.

Rates have been rising since December in an attempt to curb inflation. But will they continue to rise? And importantly, to what level? We share our outlook.

Standard Life is part of Phoenix Group, the UK’s largest long-term savings and retirement business. We work closely with our colleagues at Phoenix Asset Management to determine the outlook for markets and the investment strategy for our pension solutions. They have provided the following views.

It wasn’t a unanimous decision

Seven of the nine members of the BoE’s Monetary Policy Committee (MPC) voted for the 0.75% increase. They had concerns that the labour market is still tight, and cost and price pressures remain elevated, despite clear signs of an economic slowdown. So a more forceful monetary response was needed to bring inflation back to the 2% target in the medium term.

However, one member voted for a 0.50% move. Another member voted for only 0.25%.

Some of the accompanying guidance was more unexpected

Updated economic forecasts accompanied the rate announcement. High energy prices and higher borrowing rates are weighing on spending. So the BoE expects the economy to contract by 0.75% in the second half of 2022, and continue to shrink throughout 2023 and the first half of 2024.

The BoE predicts that Consumer Price Index (CPI) inflation will peak around 11% in the next three months, before starting to fall towards 5% by the end of 2023.

What does this mean for future interest rate moves? The BoE implied that rates may not rise as much as many were expecting. Expectations are now for rates to peak at 4.75% in late 2023, a drop from the 6.25% priced in following the mini-budget.

Declining inflation means there isn’t as much of a need for the BoE to raise rates, and may even lead to it cutting rates at some point. But this depends on inflation peaking and declining as the BoE expects.

What’s our view?

Phoenix Asset Management believes further interest rate rises will be needed to bring inflation back to target. We forecast a 0.50% hike in December, and a peak of 4.5% in 2023.

Phoenix Asset Management also thinks that the economic contraction is unlikely to be as deep as the BoE projects, but inflation will prove somewhat stickier through 2023, therefore will need additional monetary tightening.

Read our market outlook

In Market volatility – wider context and long-term considerations, we share our perspective on what’s driving markets and what it means for defined contribution (DC) pension investments.

The information here is based on our understanding in early November 2022 and shouldn’t be regarded as financial advice. The value of pension plans and other investments can go down as well as up and may be worth less than what was paid in.