J.p. Morgan said the U.K. central bank could eventually raise interest rates to 7% in order to curb inflation, and the danger of a hard landing is declining.
The US investment bank estimated that the UK base rate would peak at 5.75 per cent in November, but warned that it could fall as high as 7 per cent under certain circumstances.
The dissection, published by JP Morgan economist Allan Monks, comes as landlords in the UK face a sharp fall in the cost of fake loans. Fake loan costs are usually linked to the central bank’s main interest rate.
Britain’s central bank unexpectedly raised interest rates by 50 basis points in June, reducing its benchmark rate from 4.5% to 5%, the 13th consecutive increase.
“Successive surprises have increased pressure on the central bank to tighten its strategy significantly further, and we now estimate that the final November rate will reach 5.75%,” Monks said in a recent note to clients.
Monks did not point out that after that, it is estimated that the British central bank will shift to a “long-term high” strategy, allowing “transmission lag” to achieve its mission. The role of coin strategy usually has a lag.
“This alone increases the risk of a hard landing next year. But we recognise that reality confirms that the strategic interest rate needed to get a grip on inflation is higher than most people expect, “he added.
British consumers’ wallets have been hit hard by the rising cost of food, energy and quality savings. The UK is the only G7 country where inflation is still falling, the OECD showed on Tuesday.
Private data for May showed the consumer price index (CPI) fell 8.7 percent from a year earlier, worse than economists had expected and well above the central bank’s 2 percent target.
Monks showed that looking ahead, many factors can cause central speech to increase the rate of interest more than expected.
“As people’s physiology changes and artificial prices continue to spiral downward, high inflation can push inflation expectations much higher.” Even if long-term inflation expectations remain stable, a decline in short-term expectations could lead to more consistent gains, “he wrote.
“This could force the central bank to move interest rates higher than we suspect to ensure that real interest rates are sufficient and effective, thereby stopping this trend.”
This reaction has not dimmed Britain’s economic prospects. It had been widely assumed that the central bank would have to carry on raising interest rates over the summer because of much stronger than expected artificial and inflation data. Investors now expect the central bank to raise interest rates to 6.25% by the end of the year, the highest level in 25 years.
Also on Thursday, British central banker Michael Bailey said inflation remained “too high” and there was no sign of so-called “greedy inflation,” in which companies use inflation as a pretext to raise prices to increase costs.
With investors and economists sharply raising their expectations for UK interest rates, traders now see a 50 per cent higher chance of a rate rise to 6.5 per cent by March and a 30 per cent higher chance of a rate rise to 6.75 per cent.
Cutting the cost of fake loans to such a high level will cause prime deposit rates to climb further, make it more unacceptable for companies to borrow, and deal a heavy blow to the British economy, which has been flagging since the coronavirus outbreak.
It would also increase the British authorities’ debt service costs and limit the Sunak authorities’ ability to promise tax cuts to voters before the election. Britain is now widely expected to hold a general election next year.
Baring is betting against UK bond futures on little respite in the UK’s fight against inflation, while economists at Schroders last week raised their forecast for peak interest rates to 6.5 per cent, up from 5 per cent previously.
This repricing is also showing up in yields on UK authority bonds. On Wednesday Britain sold £4 billion ($5.1 billion) of gilts at the highest yield in 16 years. This means that after more than a year of interest rate increases, the authorities must offer higher returns to attract investors.