Schroders said that despite thirteen consecutive rises in the base rate, evidence suggests that the rate raising cycle is not over yet. It forecast that the base rate will go as high as 6.5 per cent by the end of this year, with further half point rises in August and September.
Among economic experts, 6.5 per cent is one of the highest predications, and Schroders also anticipates that this will drive the UK economy into a recession.
Schroders noted that the BoE also does not have the luxury of a wait and see policy to see how the thirteen rate increases have effected the UK economy.
As little as a month ago, Schroders felt the BoE would use its forecasts of falling inflation to justify a pause in base rate hikes by the autumn, with cuts early next year. But with its ability to make credible forecasts under question, base rate levels now seem to be more dependent on incoming economic data.
Recession on the way
Schroders said that the BoE has set a course where tackling inflation has become a priority over growth, more so than any other major central bank. And it’s a trade-off that is increasingly likely to result in an economic downturn.
Currently the level of UK GDP is around the same level for September last year. Schroders expected that the growth easing effects of higher interest rates will be felt by the end of this year. As a result a recession is forecast for between the fourth quarter this year and the second quarter for next year, with a total fall in GDP of 0.6 per cent.
