The Bank of England will decide whether to increase the cost of borrowing further on September 21 but the economy is already “cooling fast”, according to Hargreaves Lansdown.
Hargreaves Lansdown said the market is now expecting two more rate hikes to 5.75 per cent before the end of the year.
But Susannah Streeter, head of money and markets at the firm, said the “interest rate medicine” is working but with unfortunate side effects of a sharp drop in economic activity, and expectations are rising that a mild recession is on the way.
“There’s been a lag between the rapid hikes in rates and the impact on the business landscape but now the outlook is deteriorating fast,” she said.
“The closely watched Purchasing Managers Index (PMI) reading – the flash UK composite PMI - came through at 47.9 this month and anything below 50 marks a contraction.
“This is the lowest level in two and half years so forecasts of where interest rates will end up have been ripped up and re-assessed.”
Hargreaves Lansdown said the market consensus is still for another rate hike in September to 5.5 per cent because wage growth came in so hot in July.
There is a chance it could be the last in the cycle, but right now the market consensus is for two more hikes, until there’s a pause.
“However, forecasts can change very quickly and interest rate expectations may well be revised lower again if fresh data on the jobs market points to a further rise in unemployment and recruiters indicate employers are becoming even more cautious about hiring staff,” Streeter said.
“Already the Bank of England has warned that half of all businesses that have borrowed will struggle to pay their debts by the end of the year, up from 45 per cent last year and this is set to lead to more corporate wariness when it comes to pay rises and taking on new staff, which is likely to have a dampening effect on wage growth.’’
The outlook for mortgage rates
Elsewhere, the PMI data showed how worried businesses are about the outlook, and the market has immediately started pricing in two rises rather than three – and a lower peak, the firm said.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This isn’t going to make a major difference today to anyone on a variable rate mortgage, as these tend to rise and fall when the Bank of England moves the base rate.
“It’s likely to mean that the future feels a bit less daunting – because their rate is likely to be hiked less in the coming months. However, it’s still likely to be quite some time before we see these rates fall.”
She explained that it’s good news for anyone looking for a new fixed rate deal, because these mortgages are based on the swaps market – where banks swap a variable rate for a fixed one.
