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United Kingdom: Growth At A Slower Pace And Rising Rate

With inflation still very high, the 12th hike in Bank of England policy rates should not be the last.

By EC Invest

While the first quarter of the year saw a slight 0.1% growth compared to the previous quarter (and only +0.2% year-on-year), the Bank of England raised its key interest rates.

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The 12th increase in key interest rates since December 2021 was 4.5%. It also marked a change of discourse by the London authorities. Until now, they signalled the time to end the boom cycle as the economy was expected to enter a shallow but protracted recession, and inflation was expected to relapse rapidly from the end of the year.

They now see a long period of weak growth with a still tight labour market and more persistent inflation, which will remain high in 2023 and 2024, returning to the 2.0% target only in 2025. On this front, the United Kingdom is currently the last of the G7 countries. In March, inflation was still 10.1%. To combat it, the Bank of England will have to raise key interest rates again, with markets expecting a peak of around 5.0%. This should continue to support the British pound, one of the few currencies that appreciated (somewhat) against the euro this year.

On the other hand, persistent inflation and higher credit in a country where consumers are heavily indebted will weigh on growth.

The outlook for the British economy remains bleak. Nevertheless, we maintain exposure to the London Stock Exchange, a cheap market comprised mainly of multinational companies with a defensive profile whose horizons far exceed the British Isles.

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