The Bank of England (BoE) is anticipated to maintain interest rates at their highest level in 15 years, despite mounting pressures on the UK economy. With inflation more than three times the target rate, the BoE has implemented a series of 14 consecutive interest rate hikes since late 2021 to combat the rising inflation, adversely affecting the housing market, employment, and consumer spending.
Notably, British inflation remains the highest among advanced economies worldwide. Although there has been a decrease in core inflation, which excludes volatile fuel and food costs, service price inflation—a closely monitored metric by the BoE—has risen. In October 2022, consumer price inflation peaked at 11.1%, surpassing comparable economies, and has been slow to decline, registering 6.7% in September. However, economists predict a substantial drop in headline inflation for October due to the fading impact of last year’s energy price surge.
Governor Andrew Bailey commented that the figures align closely with the BoE’s projections. However, the bank had previously forecasted that inflation would only return to the target rate of 2% in the second quarter of 2025. New forecasts from the BoE are set to be published on Thursday.
Furthermore, while pay growth has slightly eased from its peak, it remains at its fastest rate in over two decades, based on official data. Nonetheless, there are indications that the labor market is cooling off, such as slower growth in starting pay for individuals hired through recruitment agencies. Accurate assessment of the labor market has been impeded by issues at the UK’s statistics office in conducting surveys.
The housing market has been significantly impacted by the surge in mortgage costs. Although the property market experienced a boom during the COVID-19 pandemic, higher borrowing costs have led to a substantial slowdown in transactions and house purchases, further burdening the broader economy. It is worth noting, however, that the current 5% decline in house prices since September should be compared with the 25% surge observed from the onset of the pandemic to its peak.
Consumer spending has also been squeezed, with a nearly 1% drop in the volume of goods purchased from retailers in the three months leading up to September. This decline, the first since early 2023, cannot be solely attributed to unseasonal weather conditions. Economists have raised concerns that these weak data indicate a potential contraction in the UK economy during the third quarter of 2023, potentially marking the beginning of a recession. Moreover, a measure of consumer confidence experienced a significant decline in October, as households grappled with the burden of rising cost of living.
The BoE previously stated in August that they are likely to maintain high interest rates to combat inflation. Chief economist Huw Pill likened the situation to the flat and lengthy summit plateau of Table Mountain. Despite the strain on the economy, financial markets do not anticipate a Bank Rate cut from the BoE until August 2024, with a less than 50% likelihood. In contrast, the US is expected to implement its first rate cut in June, and the European Central Bank is also projected to decrease borrowing costs earlier than the BoE.
In conclusion, the Bank of England is expected to retain its current high interest rates in the face of persistent inflation despite the strain it is placing on the UK economy. With rising inflation affecting the housing market, jobs, and consumer spending, the BoE seeks to strike a balance between curbing inflation and avoiding a recession. However, the latest data indicates a slower decline in inflation, cooling labor market growth, a housing market slowdown, and reduced consumer spending. The BoE’s decision on interest rates will be closely observed as it publishes new forecasts on Thursday.
More detail via Investing.com here… ( Image via Investing.com )