If there is one constant in investing, it’s uncertainty. UK investors have had more than their fair share of it in the past few years, including not knowing when UK equities will finally come in from the cold. Investors are adept at weighing up risks and potential outcomes, but when uncertainty levels are high even the most experienced of us can trip up.
So it’s a relief that some issues are being resolved. We have moved to the monetary tightening end game, confirmed by the Federal Reserve and the Bank of England (BoE) last week with their respective decisions to pause rates. Most economists agree that the global inflationary surge will continue to ease. UK interest rates appear to have reached BoE chief economist Huw Pill’s mountain-top plateau, where it is clear they will stay for some time. Although the Monetary Policy Committee decision on holding the rate at 5.25 per cent was neck and neck, the number of votes in favour of a hold and comments from Pill and BoE governor Andrew Bailey point to a further pause at the next meeting in November. Peak rates reduce recession risk, but also mean weak growth is probably a given.
Economists’ attention is now being drawn to when the BoE will make their first cut. Kallum Pickering at Berenberg expects the BoE to keep the rate unchanged at 5.25 per cent until Q2 next year. Others think loosening will come later. Jennifer McKeown at Capital Economics anticipates that UK interest rates will be on hold for the best part of a year before cuts commence – but that, when the BoE is convinced inflation is under control, it will in fact reduce rates further and faster than investors expect. Bank of America expects rates to stay on hold throughout 2024 (although it isn’t ruling out the risk of a further hike in two months’ time), and that this will be followed by four 25 basis point cuts in 2025.