Economists at Goldman Sachs have warned that the UK interest rate will hit 5% this summer, which would be bad news for people with mortgages and other borrowers.
The investment bank said the Bank of England had been “too pessimistic” about the UK economy, with growth likely to be stronger than expected in the coming months - forcing Monetary Policy Committee (MPC) policymakers to lift the rate from the current 4.25%.
“We therefore expect the Bank to continue to hike in 0.25% steps until 5%, despite its reluctance to do so,” Goldman Sachs added.
“Another 0.25% hike at the May meeting is very likely, paired with a significant upgrade to the MPC’s growth projection, which has turned out to be too pessimistic.
“We believe that it will be difficult for the Bank to stop tightening in light of the firm data and we look for two further 0.25% steps in June and August.”
Meanwhile, the Telegraph also says the boss of Barclays has stated that the UK economy is still not “out of the woods”, despite the bank posting its strongest quarterly profits
Outlook 'a little better'
CS Venkatakrishnan said: “The macro-economic outlook around the world – not only the UK or in the US – is a little better today than it was six months ago. That doesn’t mean they’re out of the woods.”
“I mean, inflation is falling…growth is flattish, it’s better than we thought it would be. But it’s still not back to what we would consider we’d need to see for a ‘soft landing’. And so I think that that requires us to be a little cautious because the rate-rising cycle is not complete.”
It came as profits at the FTSE 100 lender jumped by more than a quarter during the first three months of the year after rising interest rates boosted its retail banking and credit cards businesses.
Net profits came in at £1.8billion for the first quarter, up from £1.4billion during the same period last year. Revenues climbed by more than a tenth to £7.2billion, beating expectations.
The bank’s UK consumer-lending arm posted a particularly strong quarter with profits jumping by nearly a third. Barclays said this was “primarily driven by net interest income growth from higher rates”.
US recession?
The US economy is heading for recession, economists have warned after official figures revealed activity slowed sharply at the start of this year, dealing a blow to Joe Biden’s re-election campaign.
The world's biggest economy grew at an annualised pace of 1.1% in the first three months of the year, according to the Bureau of Economic Analysis. This compares with growth of 2.6% in the final quarter of 2022 - and also falls short of economists' expectations for 2% growth in Q1.
While the rise in gross domestic product was driven by robust consumer spending, it also suggests nine consecutive interest rate rises by the Federal Reserve are beginning to drag on growth.
President Biden has announced he will run for re-election in 2024, and this week touted his efforts to revive the American economy after the pandemic.
But Ian Shepherdson, chief economist at Pantheon Macroeconomics, told the Telegraph that activity at the start of the year was boosted by one-off factors including the warmer weather and a 8.7% one-off cost-of-living adjustment to benefits.
Brake on spending
He added that a sharp slowdown in business activity in the coming months would hit the economy, while slower hiring “was likely to make people nervous”, and put a brake on spending.
“In short, the economy barely grew in the first quarter, but it is likely to shrink outright in Q2 and Q3,” Mr Shepherdson said. “Welcome to the recession.”
FTSE 100
The UK's top share index, the FTSE 100, was up four points at 7,835 shortly after opening this morning, following yesterday's 21-point loss.
Brent crude futures were 0.6% higher at $78.84 a barrel.
Companies reporting today
- Q1 results: Chevron, NatWest
- Trading update: Pearson, Smurfit Kappa