After the UK’s annual inflation rate unexpectedly held steady in September, investment managers discuss the impact and the possibility of a potential interest rate rise.
Latest data released this week by the Office for National Statistics shows that UK headline inflation remained at 6.7 per cent in September, the same as in August, raising questions over the Bank of England’s next decision on interest rates in November.
This was driven by soaring fuel prices. Core inflation, which strips out food and energy prices, fell slightly from 6.2 per cent in August to 6.1 per cent.
“As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we will still expect it to keep falling this year. This news just shows this is even more important so we can ease the pressure on families and businesses,” Chancellor of the Exchequer Jeremy Hunt said.
With UK interest rates currently standing at a high of 5.25 per cent, there is pressure for the Bank of England (pictured) to keep rates higher for longer or even raise rates for one last time to combat inflation. This is after the government pledged to reduce inflation to 5 per cent by the end of the year, with the longer-term target being 2 per cent.
Here are some reactions from investment managers to the latest news.
Nicholas Hyett, investment analyst, Wealth
"September’s inflation numbers present a messy picture. At the headline level, the consumer price index is flat month-on-month, but under the surface there are a lot of moving parts. Food prices have fallen while more domestically-exposed sectors like restaurants and hotels have seen prices rise. Higher prices for motor fuel are also having an effect. That makes it a difficult set of numbers to interpret – especially for interest rate setters at the Bank of England. Had inflation continued to fall, as many had expected, then there would be a strong case for rates to stay where they are – slowly squeezing inflation out of the economy. However, if inflation remains stuck at its current stubbornly high level, that’s a whole different kettle of fish. No-one wants inflation to remain stuck where it is for an extended period. If the Bank thinks that’s a danger, they may well feel their only option is to set rates on an upwards trajectory once again.”
Daniele Antonucci, chief investment officer at Quintet
Private Bank (parent of Brown Shipley)
“UK inflation surprised to the upside, with the headline measure coming in unchanged versus the previous month and core down a notch, but still exceeding expectations. Taken at face value, these numbers keep the pressure on the Bank of England to continue raising interest rates a while longer.
“That said, it’s also becoming more evident that the economy is slowing. We expect a mild recession to unfold over the coming months. These two dynamics, slowly declining inflation but still above target and weakening economic activity, suggest that we’re close to the peak in interest rates. But, as the inflation battle isn’t won yet, even when rates do peak, we think central banks will keep them elevated for some time to ensure there’s no inflation resurgence. We also believe that, as rates reach a plateau, high-quality bonds become more attractive. Historically, their yields tend to trend in line with central bank rates.This is why we recently added longer-dated UK bonds to portfolios to capture this higher yield, while also adding a cushion should the economic outlook deteriorate.”
Amanda Aumonier, director of mortgage operations and
sales at Better.co.uk
“The Bank of England might now opt to increase the base rate next month as it continues to try and get inflation under control, which would be bad news for potential homebuyers as well as current homeowners on tracker mortgages and homeowners up for remortgage soon. Current geopolitical challenges may also influence the economy in the coming weeks, putting more pressure on the Bank of England to hike interest rates – predicting the exact outcome is impossible, but could ultimately impact mortgage rates."
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood
“The light at the end of the tunnel is still a long way away. Inflation is proving very sticky, remaining at a level that will keep many households on their toes. Inflation does more to individuals’ finances than just increase the costs of their utilities and the weekly shop – prolonged periods of high inflation diminish the value of savings in real terms. Thankfully, we're in a position now where higher interest rates mean opportunities to achieve competitive returns on savings. But crucially, as many consumers will be acutely aware, not all banks have been passing better rates on to savings' customers, essentially triggering a 'loyalty penalty' for savers who do not shop around. As inflation and interest rates continue to shift, the onus is on consumers to consider where best to put their money to maximise returns.”
Mohsin Rashid, CEO of ZIPZERO
"The headlines are clear: inflation remains a huge issue. Every day goods continue to get more expensive at a fast rate, and today's data provided no silver lining. A dark cloud still hangs over people’s finances, with many struggling to afford even the most basic necessities like groceries as inflation remains sky high. Those unable to fill their shopping trolleys or feed hungry mouths cannot wait years for inflation to crawl back to bearable levels – support is needed now. At least food inflation has slowed of late, but it’s still time for supermarkets to do away with ‘greedflation’ and start offering shoppers savings that truly help their pennies stretch further. For the government, keeping a fair and watchful eye over prices is key to helping Britons get back on top of their finances. Today's figures underline that much more must be done.”
Lily Megson, policy director at My Pension
“They say consistency is key, but this isn’t the case today. Over a year-and-a-half riddled with economic challenges and sticky inflation, the cost-of-living crisis has left households grappling with uncertainty. We all know that there will be no quick fix to this. However, Britons would likely feel more confident if there was a strategy in place to help ease the financial burden – but this does not seem to have come to fruition. It is therefore vital that savers take advantage of all the support available to help them understand their financial situation and plan for the future. Guidance or even better, independent financial advice, could equip savers to navigate this challenging economic climate. Understanding that help is readily available, and that people don’t have to tackle financial uncertainty alone, is vital.”
Jatin Ondhia, CEO of Shojin
“Clearly, there is a long way to go to properly stabilise the economy and financial markets. So, prudence must remain the guiding principle for investors and, to that end, diversification continues to be a likely strategy for many, serving as a safeguard against market volatility. Indeed, investors must continue to be proactive, exploring all the different options available to them. It is still difficult to say where inflation and interest rates will go in the medium to long term. People must maintain control over their financial decisions, ensuring that each decision – whether for their savings or investments – aligns with their own risk tolerance and long-term financial goals.”
Douglas Grant, group CEO of Manx Financial
“CPI inflation remaining unchanged signals that the road ahead is far from being without bumps and, as SMEs account for around half of all private sector turnover in the UK, we need more innovative measures to ensure their survival. The implementation of short-term loan schemes in the last few years has been positive but we believe that it is vital that the government continues to expand measures to fuel, SME resilience and kick-start growth. We have been advocating for a permanent government-backed loan scheme that is sector-focused and involves both traditional and non-traditional lenders to secure the future of our SMEs. As concerns mount over the future of the economy, the significance of implementing a permanent scheme cannot be overstated, it could serve a pivotal role in sustaining economic recovery and in turn, determine the survival of numerous companies."