At the last meeting of the UK Monetary Policy Committee, interest rates were not increased. That was the first decision to hold interest rates following 14 previous decisions to hike the rate higher. The decision was tight, 5 to hold versus 4 to hike by 0.25%. The call cannot be tighter than that. Charlie and I attended a meeting held by the Bank of England for investment professionals, where it was intimated that the 4 who wanted to hike saw it perhaps as a one more hike and done, whereas the 5 who voted against were still in wait and see mode.
The next BOE meeting is held on 2nd November. The decision to add 0.25% will again probably be split. But should the rate rise, will that be the last rise? The peak?
Plateau not Peak
Until recently, theory suggested that just as swiftly as interest rates rise, once they reach the top they should equally swiftly fall. It has always been that way, because central banks tend to push rates up too far until the economy starts to break. The dreaded recession follows and the central banks need to reduce interest rates pronto to fix what they have just broken.
This time their narrative is a little different. Central banks believe they have got this just right, they haven’t pushed rates too high, there won’t be a recession, but instead a nice soft landing. They believe that this time we are going to walk away from this crisis after a gentle touch-down, not the usual crash and burst into flames. Perhaps fairy tales are real, I’m thinking Goldilocks here. Not too much. Not too little. Just right.
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