13 July 2023
If you are covering the latest UK GDP data, please find below a comment from Richard Carter, head of fixed interest research at Quilter Cheviot:
“As the government and Bank of England scramble to bring inflation down, there are signs that the large price rises and increase in interest rates are starting to bite on the economy as growth fell over the month and flatlined over the last quarter. The UK economy has done well to avoid a recession to date, but how long this can continue when rates are expected to reach 6% and beyond remains to be seen. Indeed, you just have to look at the data from the Bank of England’s recent stress test on the UK banking system to see that there are skeletons lurking in the closet when it comes to mortgage risk and people rolling onto much higher rates.
“Furthermore, while the labour market remains very tight, it is beginning to show signs of weakening and may start to roll over soon, exposing the economy to both a weaker consumer and corporates beginning to struggle. The savings accumulated during the pandemic cannot be relied on for much longer and the effects of inflation and interest rate rises to date will ultimately have sucked a huge amount of money out of the economy.”
“That said, unless economic growth turns persistently negative or we see a dramatic sudden drop, the BoE will press on with the rate rises. But, rate rises have a lag between action and reaction so we are really only seeing the first hikes really taking effect. This puts the BoE in an incredibly difficult position as it could very easily overtighten and make the economic situation worse. As a result, it will want to see inflation coming down and quickly so it can ease the pressure on the economy and begin the long journey back to more normal, palatable rates.”
