Investors eye UK interest rate decision and lower China growth forecasts

Susannah Streeter, head of money and markets, Hargreaves Lansdown:
Investors are lacking Monday motivation today as caution returns amid worries about global growth, ahead of the Bank of England decision on interest rates and testimony from the world’s most influential central banker, the Fed’s Jerome Powell. European indices have opened lower with the FTSE 100 on the backfoot as investors mull what’s ahead for the path of interest rates, given the stubbornness of inflation, while concerns persist about China’s recovery losing steam.

Goldman Sachs is the latest big bank to revise forecasts for China’s growth, cutting expectations from 6% to 5.4%. The weaker than expected outlook for the world’s second largest economy has knocked commodity stocks, with miners falling back in early trade. Energy giants BP and Shell also retreated, as recent gains in oil prices receded, amid the lower expectations in demand. The People’s Bank of China is set to try out a reverse manoeuvre to the Bank of England tomorrow, as pulls levers to stimulate demand as the recovery flags. It’s forecast to cut its benchmark loan prime interest rates, following on from cuts to its medium- and short-term policy loan rates last week to try and revive investment.

Stocks in Asia slipped back, amid concerns about China but they were also taking their cue from a lower close on Wall Street on Friday. The relief rally, hinged on expectations that the interest rate hiking cycle was nearly at an end, has fizzled out as some investors booked gains. There is also some trepidation returning about whether the end of rate rises really is in sight. Jerome Powell will give evidence to the House Financial Services Committee and the Senate Banking Committee and although he’s largely expected to repeat the mantra that the next steps will be data driven, investors will be eager for any more clues which might back up or weaken the current dot plot which pencils in two more possible rate hikes by the end of the year.

There is expected to be no letup in hikes for the UK, with borrowers bracing for another punishing interest rate rise on Thursday, pushing the base rate to 4.75%.  This will affect homeowners on variable mortgages, whose payments will ramp up yet again, reducing their spending power. But for those 1.6 million  fixed rate mortgage holders who must find a new deal this year, and who are highly anxious about how high rates will go, the Consumer Price Index snapshot due on Wednesday, will be prove more important. The current market expectations are for rates to rise as high as 5.75% and if the numbers show inflation is continuing to prove very sticky, those forecasts may be firmed up.

However, it’s important to remember that the full cumulative effect of previous rate hikes still won’t yet have been felt in the economy. Also, the current reaction on markets could do the Bank of England’s job for it with mortgage deals already shooting up in advance of the Bank’s decisions, sucking more demand out of the economy. There is every chance rates won’t have to rise as high as current market predictions, so the voting split on the committee and the Bank’s indications of future actions will be scrutinized very closely on Thursday.