Inflation and its intrinsic link to interest rates has been the focus for many... food prices have soared; energy prices have spiralled; and now mortgage renewals are eroding what’s left – I took out a mortgage product at 2.1% in 2021 and just renewed at 5.4%. Ouch! … circa1.4 million UK residents will have been in a similar position in 2023 alone. To compound things, UK stock markets have lagged, house prices have fallen, and rental costs have risen over 10% in the last 12-months. Pass me a whisky! …a cheap one.

The Bank of England had implemented 14consecutive interest rate hikes prior to the pause on 21^stSeptember. The recent ‘hold’ was the result of a surprise fall in the year-on-year headline CPI rate of inflation and tipped a knife-edge MPC vote in favour of a more ‘dovish’ approach. So, does this mark a turning point in the battle?

During Andrew Bailey’s (Governor of the BoE) address to ‘The City’ at Mansion House he stated “Looking ahead, UK headline inflation is set to fall markedly over the remainder of the year. This largely owes to lower energy prices as last year’s substantial increases dropout of the annual calculation. Food prices should fall too as lower commodity prices feed through to prices in the shops.”

Furthermore, economic data from our global peers indicates that the inflation spike is cooling and that interest rates are reaching a peak – The US Federal Reserve also opted to hold the funds rate in September.

The projections on the mortgage market evidence sentiment and the short-term ‘bump’ we are experiencing – 5-year and10-year fixed rates are lower than 2-year and 3-year fixed rates, which is an inversion of the norm. Essentially, the premium offered for mortgager certainty is usurped by the prospect of profit generation from those tied to extended fixed terms. Bond issues mirror this dynamic.

Whether we at the end of the rate cycle in the UK, or simply nearing it, is unknown, with many anticipating a further25bps rise before the close of 2023. To stoke this fire, we have several factors at play which require consideration.

A key threat is the extension of voluntary supply cuts by Saudi Arabia and OPEC+. Higher crude oil prices typically take about a month to show at the pump, so the UK can expect to see higher prices in the coming weeks, and a knock on to supply costs and product pricing.

Also to be considered is the wage-price spiral and the effect of large-scale industry strikes (diminished supply) and wage hikes. In addition, the Prime Minister promised to increase the National Living Wage during his conference address, and this is likely to lead to further cross-sector wage rises and pressure on company performance.  

On balance, I believe the end of the rate hike cycle is in sight, bar systematic shock, and this element, in conjunction with tamed inflation rates, may provide the stability and confidence investors require.

The timing issue is then presented…  fixed interest returns and reduced access to capital hold back current asset valuations, especially for growth businesses –see the disappointing FTSE AIM performance. Conversely, once interest rates feather down you would anticipate a resurgence from the “good” companies in this sector and a return to value for investors – ‘buy low and sell high’ is a key principle. Where the axis of ‘guaranteed short-term returns’ dissects with the ‘return to value of the financial markets’ is the unknown, but patience and time in the markets is a proven wealth maximiser.

Rob Cowsill, SW Financial Planning

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