Thomas Lyons 
The United Kingdom is facing a potential recession as untamed price pressures have set off alarm bells. Investors are worried that there will be sharp increases in interest rate hikes. The fear of this sent shares sharply lower across Europe. The headline annual rate of British consumer price inflation fell to 8.7% in April from over 10% in March. However, investors were more concerned with the leap in core inflation to a 31-year high of 6.8%. This is seen as evidence that price pressures are becoming increasingly domestically generated.
Neil Shearing, group chief economist, and UK chief economist Paul Dales, at Capital Economics in a commentary, said: “Accordingly, we now expect the Bank of England to raise interest rates further than we previously thought, from 4.5% now to a peak of 5.25%. This makes a recession at some point more likely — although the recent resilience of economic activity suggests that it may now happen a bit later than we had anticipated.” The Bank of England and International Monetary Fund expect Britain will avoid a recession. However, Derek Halpenny, head of global markets research at MUFG, told clients “there can be no sugar-coating of this data and it’s a terrible inflation print that really sets the UK apart from other major developed economies in having a more serious inflation problem”. “The BoE will inevitably hike again in June and potentially in August as well,” he said.
The yield, or interest rate, for British gilts or bonds spiked significantly higher, suggesting British households will face higher mortgage repayments. Stock markets across Europe were hit by the news. The Europe-wide Stoxx-600 index slid almost 2%, its worst one-day showing since mid-March. The Iseq index ended 2.4% lower, with shares in AIB and Bank of Ireland falling by 4%. Paddy Power owner Flutter, down 4.5%, and packaging giant Smurfit Kappa, down 3%, were also significant movers in the session.
The British core inflation numbers also put the focus on the next likely rate moves by the European Central Bank, which has long warned that core inflation remains elevated in the eurozone too. “Inflation is still very high across the eurozone and particularly the UK at the moment, and that is negative overall for consumers and businesses,” said Michael Field, equity strategist at Morningstar. The yield, or interest rate, on the 10-year Irish bond traded late Wednesday at just over 2.9%, compared with the equivalent British gilt at over 4.2%, according to Trading Economics data. The 10-year German bund traded at 2.47%.
Investors see a 100% chance that the Bank of England will raise rates next month to at least 4.75% from 4.5%. They also see just over a 50% chance that rates will reach 5.5% by November, according to financial markets. The fear of further interest rate hikes has caused investors to bet that the Bank of England will be forced to keep hiking interest rates through the summer before reaching peak levels higher than previously thought. The fear of this has caused shares to fall across Europe.
In conclusion, the United Kingdom is facing a potential recession due to untamed price pressures. Investors are worried that there will be sharp increases in interest rate hikes. The fear of this has caused shares to fall sharply across Europe. The Bank of England and International Monetary Fund expect Britain will avoid a recession. However, investors are betting that the Bank of England will be forced to keep hiking interest rates through the summer before reaching peak levels higher than previously thought. The fear of this has caused shares to fall across Europe.
