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As broadly expected, the Monetary Policy Committee (MPC) voted to increase the UK base rate at their Thursday meeting. The relative surprise however was the extent of the hike, with the committee voting in favour of a 50 basis points (bps) increase to bring the base rate to 5%, its highest level since 2008. 

We have some sympathy with the position of UK policymakers. The United Kingdom is an economic outlier with core inflation proving stickier than expected and higher than any other G71 country, and the job market also remains very strong relative to history. The risk of over tightening must be considered although indecisive action could prove just as detrimental if inflation is not curbed. 

The decision to raise rates by 50 bps has been met with some fright—at time of writing the UK market had retrenched by nearly 1%.2 The more cyclically exposed FTSE 250 Index3 has contracted further as the domestic/consumer stocks prevalent in this index sold off on fears of worsening consumer budgets. 

Rates are now expected to peak at around 6% in the coming months. Whilst no government intervention for homeowners could hurt the house builders, Martin Currie is of the view that pro-growth measures with inflation running hot will do more harm than good in the long run. 

In our view, the UK market remains extremely cheap both on a global and historical basis, but we also believe it will not perform until we start to see inflation begin to fall.

Endnotes

  1. The Group of Seven (G7) is an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
  2. Source: London Stock Exchange.
  3. The FTSE 250 Index is a capitalisation-weighted index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange.

 

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