The odds of a UK rate hike in 2024 – what if 87% of people are wrong?

On February 1st, when the Bank of England (BoE) announced that it had decided to keep interest rates steady at 5.25%, it surprised no one.With growing optimism that the Federal Reserve in the United States may cut rates as soon as March, and that the European Central Bank may follow suit around June, many are viewing the current rate holds as a necessary bit of theatre to keep up the ‘higher for longer’ charade before lowering interest rates as quickly as possible.But what if that’s not the case for the United Kingdom, with its very different current economic backdrop? What if a very different surprise was waiting?‘Little evidence’ of rate cut eagernessNicholas Hyett, an investment manager at UK-based high net-worth investment service Wealth Club, had this to say:Before Christmas, investors had built up a picture of central bankers as trigger happy rate cutters, just waiting for the first excuse to get rates falling once again… [but] there’s little evidence central bankers are rate cut hungry. Rates were unchanged as expected [in the latest BoE decision] but two MPC members voted to increase rates – arguing that monetary policy need to be restrictive for longer to get core inflation back under control.”An 87% disconnect The trouble is that the public does not have the same view. New research is finding that UK residents, in fact, think the opposite is true.Source: The Clifton Private Finance Mortgage Pulse Report 2024In a recent study by Clifton Private Finance, namedThe Clifton Private Finance Mortgage Pulse Report 2024, thousands of visitors to the site were asked in between November 2023 and January 2024 if they believed interest rates would rise.And what they found was that the vast majority – 87% of all participants – felt strongly that interest rates would either stay the same or drop in the next 12 months. Of these, 62% actively seemed to think rate cuts would happen, while almost 25% felt rates would stay the same.Just 13.4% of respondents were willing to consider the possibility that interest rates might actually rise within the next year, for any reason.After shockA rate hike for the UK rather than cuts later in 2024 would certainly be a surprise to many – and the kind of shock that may send markets into a temporary tailspin. But how likely is this?Central banks have said again and again in recent months that they are willing to ‘turn the whole thing around’ and raise rates again, should they see the slightest sign of inflation rearing its head again. On February 1st, Governor of the BoE Andrew Bailey said the following at the BoE’s monetary report press conference:If we were to keep Bank Rate at 5.25% for the next three years, we think it is likely that inflation would eventually fall significantly below target. But if we were to follow the market-rate conditioning path [of lowering interest rates], we think inflation would be above target for much of the next three years. We have to keep monetary policy sufficiently restrictive for sufficiently long. For how long will a restrictive stance be needed? What level of Bank Rate will be required to deliver it? The answers to those questions will ultimately depend on what the incoming data tell us about the outlook for the UK economy and inflation over the medium term.”In other words: ‘if no external, geopolitical headwinds come again, the way that Russia’s invasion of the Ukraine did the first time, then the chances of us lowering the interest rate in the medium-term look good. If not, we stay as restrictive as ever.’The trouble with this is that there are significant headwinds already: the ongoing crisis in the Middle East, which Bailey directly referred to in his same monetary policy report speech.The bottom lineAn interest rate hike from the BoE, instead of the long-awaited rate cuts the rest of the world is banking on, is not out of the realms of possibility.Let’s just hope that, if a hike happens, the shock such an unanticipated decision would have on UK markets wouldn’t push its already-flailing economy too far to see any growth this year.The post The odds of a UK rate hike in 2024 - what if 87% of people are wrong? appeared first on Invezz