The Bank of England decision to hike interest rates by a quarter point on Bonfire Night last week was something of a damp squib news-wise, coinciding as it did with the “Bluenami” sweeping the US following the mid-term elections. Unlike the Democrats’ success in flipping both houses of Congress, the Monetary Policy Committee’s unanimous decision didn’t come as much of a surprise to market watchers with interest rate futures pointing to an increase for some time. Of course, one of the main contributors to the Bank’s decision was the impact of the war in Iran on global energy prices and supply chains.
A feature of Trump’s second term is that we have become numb to each ever-more outrageous act, whether it’s setting spuriously calculated tariffs, cosying up to Vladimir Putin or starting thinly justified wars. While we might feel like the apocryphal boiling frog as each act builds on the last, the reality is that Trump’s actions, however poorly conceived, have had serious ramifications for the global economy and ours too. The war in Iran provides a useful timestamp: immediately before the war 10-year Gilt yields were at 4.2%, inflation was 3% and expected to fall towards target and 2-year fixed mortgage rates at 3.5%. …all relatively optimistic! Nearly nine months into the conflict, Gilt yields remain above 5%, the BoE forecasts inflation to hit 5% next year and those mortgage rates are now closer to 5.5%.
The Democrats’ success does give us hope that this is not an interminable situation and while mid-terms are no guarantee of electoral victory in 2028, the tide is turning. The markets sense this too with oil prices falling, reflecting this shift in power in Washington and the markets’ hope for de-escalation in the Middle East. At the end of October Brent was priced at $115 a barrel and has now fallen to $92. If this continues, then there’s a good chance that the BoE’s prognosis will turn out to be too gloomy and that future interest rate rises currently forecast by the market won’t be needed to calm inflation. There’s always the argument that monetary policy shouldn’t be the only tool available to do this anyway…
And there are certainly sectors of the UK economy that need help, in particular the housing market. The Labour government has pretty much conceded at last that it will miss its 1.5m target for new homes over this parliament, with Angela Rayner saying that it was always “a stretch target”. Mortgage approvals for house purchase fell by 8% in the three months to September thanks to mortgage rates climbing on the back of the Iran conflict. The new Your First Home initiative may well encourage demand at the margin, but a sustained market recovery needs lower mortgage rates and energy costs to drive improved affordability.
Last week’s interest rate rise might have got lost in the noise coming from the US, but if the oil price continues its fall, then the Bank’s next forecast might come with more of a bang…