As no-deal risk subsides, UK interest rates should move higher - J.P. Morgan Asset Management

As no-deal risk subsides, UK interest rates should move higher

Contributors Ambrose Crofton, Global Markets Insights Strategy Team

Today the Bank of England’s (BoE) Monetary Policy Committee met, and decided unanimously to keep interest rates on hold at 0.75%.

This was in-line with market expectations and so there was limited impact on UK markets. While rates remained on hold today, the reducing levels of slack in the economy suggest that pressure continues to increase on the BoE to raise its key policy rate.

In our view the Bank of England should deliver a modest tightening of policy this year. The economy is clearly at full capacity and inflationary pressures are building. The labour market continues to surpass expectations and set new records – employment is at an all-time high, unemployment sits at a 44-year low and wages are increasing at their fastest pace since the Global Financial Crisis. UK unit labour costs are now rising at 3.1% year on year. The latest BoE forecasts indeed show that growth is set to remain well supported, and inflation continue to increase, reaching above the target level at the end of the forecast horizon (see Exhibit 1).

Exhibit 1: Bank of England forecasts

Source: Bank of England, J.P. Morgan Asset Management.y/y is year on year. Data as of 2 May 2019.

Brexit uncertainty has been the main factor preventing the Bank from responding to rising inflationary pressures. While uncertainty remains, the risk of the most adverse scenario – no-deal – has receded considerably. Recent weeks have demonstrated there is very little appetite for such an outcome in either UK or EU political circles.

The Bank will however find itself swimming against the tide of policy elsewhere given the recent dovish pivot from the US Federal Reserve and European Central Bank. A global manufacturing and trade malaise has emerged, likely caused by weakness in Chinese demand and ongoing global trade tensions. But our base case for this year is that growth will stabilise at roughly trend rates in the US and Eurozone. There are signs of this stabilisation in the recent data.

In summary, no-deal risk is subsiding, and along with it the most adverse scenarios for the UK economy. It also seems highly likely given the recent improvement in the public finances that there will in the Autumn be a boost from fiscal policy, which will push the UK further above capacity. The Bank of England should take this opportunity to modestly normalise interest rates from their current very low level.

Related products

JPM UK Dynamic Fund
For access to the best British growth opportunities, this “best ideas” fund identifies UK equities with the optimum mix of value, quality and momentum—characteristics that have been proven to outperform over the long-term.
JPM Europe Dynamic (ex-UK) Fund
JPM Japan Fund

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.