Inflation expected to head downwards but little relief yet in sight for interest rates
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ”As inflation is again forecast to head downwards, there is more enthusiasm and relief in the air at the prospect of borrowing costs easing in 2024. Grocery price inflation slowed again in November, according to Kantar, which is expected to feed through into a shallow dip, after a larger than expected fall in the headline rate in October. Government bonds have been rallying this month as investors have placed more bets on interest rates cuts coming sooner, in May or June. The latest GDP snapshot showing the UK economy contracted in October will also add to speculation that policymakers will soften their tough stance, given that recessionary winds are whipping up again. The UK is stuck in the mud of stagflation with little hope of being pulled out any time soon.
But central bankers are still contemplating the mountainous journey they have ahead. Bank of England policymakers are highly likely to vote to keep rates on hold again on Thursday, and they look set to be in it for the long haul. While we may feel like we’ve trekked up the Matterhorn and are on the descent, there is the chance we’re going to be stuck on Table Mountain for quite some time, with a long plateau ahead before cuts are in sight. Bank of England policymakers look set to dig in their crampons for longer than their European and American peers. It’s partly because wage growth in the UK, although easing, is still at an uncomfortably high level. Although vacancies have dropped and unemployment has edged up, the labour market is still tight, with average weekly earnings rising by 7.3%. Part of the problem appears to be a mismatch between workers available and the skills businesses need. The risk is that if wages stay high the cost will continue to be passed on to higher prices of goods and services.
Policymaker will also have a keen eye trained on the pound, as a lower sterling, prompted by rate cuts, could increase the costs of imported goods priced in dollars. Although oil prices have retreated amid expectations of lower demand next year, OPEC+ are ready to extend production cuts and there is also a risk that geo-political tensions will rear up again, pushing crude costs higher. Inflation is still like a stubborn mountain goat. Policymakers are trying to coax it down, without causing it to stumble into undershooting the 2% target or tripping the economy into a recession. But it looks like it’ll be hard going on the last part of the trek down.”
