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CONTRIBUTORS

Ben Russon, CFA

Lead Portfolio Manager & Research Analyst
Martin Currie

A hawkish start to 2024 has weighed on UK equity market sentiment. But despite the surprise of higher than expected inflation, economic data remained strong, and central banks including the Bank of England (BOE) kept rates on hold.

Developed economies, including the UK, recorded higher than expected readings for the Consumer Price Index (CPI). The UK’s CPI rose 4% in the 12 months to December 2023, which was up from 3.9% the previous month. Increases in the price of alcohol and air fares were notable contributors, with the latter contributing due to an increase in its relative weighting in the CPI basket of goods and services during the year.

Inflation, combined with stronger than expected Gross Domestic Product (GDP) data in the month, caused the market to push out expectations as to when the BOE will first cut rates.

Inflation is set to fall toward the 2% target at the end of this year and interest rates currently remain at 5.25%. Against this backdrop, the Monetary Policy Committee (MPC) must balance the increase in wages and benefits that we will see throughout 2024, with the dramatic decrease in wholesale energy prices combined with a still strong jobs market. How much they are prepared to look through short-term influences in the general price level from falling energy will be a key matter of debate.

Ultimately, the month in which the first cut happens is less important than the actual terminal rate that we reach in this rate cycle. It is the terminal rate that matters for asset values, and analysts expect this to be around 3% given the outlook for inflation over the medium term.

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