Interest rates acting as the main inflation-fighting weapon
- On December 21, 2022
- By GrowthInvest Marketing
By Frédérique Carrier, Head of Investment Strategy in the British Isles and Asia at RBC Wealth Management
November inflation in the UK ticked down and was below expectations. Unlike in the U.S., where inflation is now much below its June peak, UK inflation remains stubbornly elevated, reaching 10.7% y/y compared to the 41-year high of 11.1% y/y a month earlier.
Encouragingly, with half of the main consumer price inflation categories making downward contributions, including alcohol and tobacco, clothing and footwear, and recreation, consumer price inflation may have peaked. Households and businesses struggling with the cost-of-living crisis will hope that is the case.
Facing double-digit inflation in Europe, the Bank of England opted to increase the Bank Rate 50 basis points (bps) to 3.5%, the highest level since 2007, at its last meeting of 2022. A tight labour market, partly due to a labour shortage after the pandemic and Brexit, likely influenced its decision, in our view. For now, RBC expects rates to peak at 3.75% in Q1 2023 and to be maintained at that level throughout the year.
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