What Next For Interest Rates? 3 Things To Watch

Let’s cut to it:

1. The last rate rise was smaller than the previous, is that a trend?
2. Two members of the MPC wanted no change in interest rates, will that sentiment grow?
3. Shortages in the labour market are being highlighted as inflationary issues, will Government policy move?

Why and what’s the thinking here?

Where are interest rates going to go in 2023? Will they peak? Will they start to reduce? In short it is a matter of opinion. Add up all the variables, divided them by what may happen then see where you are.

Or, read these comments by the lead economist for Lloyds Bank which show the views of the MPC and the differences that exist:

• The Bank of England hiked interest rates by 50bps in December, lifting the Bank Rate from 3.0% to 3.5%. This ninth
  consecutive increase means Bank Rate has risen at every policy meeting since December 2021
• However, at 50bp, the increase was smaller than that delivered in November (75bps) and two members of the Monetary
  Policy Committee (MPC) voted for ‘no change’ in Bank Rate, the first votes for no policy change since the current hiking cycle
  began. Those members expressed the need to allow for the lagged effect of monetary policy to pass through and that a Bank
  Rate of 3% was probably sufficient to bring inflation back to target in the medium term
• Conversely, one MPC member preferred more forceful tightening to prevent a high inflation psychology becoming embedded
  as well as prevent the need to continue tightening monetary policy as the economy slowed further
• This broad range of views within the MPC suggests finding a consensus at future policy meetings could become increasingly
  challenging against a backdrop of ‘considerable uncertainties around the outlook’. However, concerns of a tight labour
  market and elevated services inflation translating into greater inflationary persistence means that further monetary
  tightening is likely
• Interestingly, in contrast to their previous update, this time the MPC chose not to explicitly push back on market interest rate
  expectations that currently point to a peak in Bank Rate of 4.65% in 2023. Instead, the committee pointed to the need to
  tighten monetary policy ‘forcefully, as necessary’.

The Summary

There are several things to watch here. The next MPC meeting is going to be interesting (get the pun?), less for the outcome and more for the notes that follow. It is rare that the voting remains the same and I wonder if the pay settlement for striking workers will provide as impetus for increased pay generally.

By Dave Farmer

*Lloyds Bank economic update January 2023

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