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Has There Been a Turn in The Inflation Tide?

An August 2023 Market Update by Hilltop Credit Partners (HCP) has revealed that the recent pull-back in rate expectations is providing relief to a slowing economy and housing market.

June’s inflation data was a much-needed shot in the arm for the UK economy, housing market and financial markets, coming in below expectations for the first time this year.

Inflation fell to a 15-month low of 7.9% year-on-year, down from 8.7% in May and below expectations of 8.2%. Importantly, core inflation fell for the first time in five months.

The data has helped to reign in expectations for the future path of interest rates. Over the past three months, market expectations for “peak BOE rates” had increased markedly from ~4.75% to ~6.5%, with some market observers predicting rates as high as 7%.

However, following a round of softer economic, labour market and inflation data over the past several weeks, markets are now pricing in peak rates of ~5.75%, and HCP believes that over the next quarter, these expectations are likely to fall further.

Why? The report states: ‘The Bank of England may well begin to realise (finally) that just as it waited too long to begin raising interest rates, it is now behind the curve again, hiking too aggressively amid mounting evidence that “hot” headline inflation and wage data has been masking an unfolding slowdown as the impact of 13 consecutive rate hikes works its way through the economy. 

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