The Bank of England is expected to maintain its interest rates at a 15-year high, despite growing concerns about the strain on the economy. This decision comes as the UK battles an inflation rate that is more than three times higher than its target, making it the highest among the world’s rich economies. The Bank had implemented 14 consecutive interest rate increases between late 2021 and August this year to tackle inflation, but the impact is starting to affect the housing market, jobs, and consumer spending.
Consumer price inflation in October 2022 reached 11.1%, surpassing other comparable economies, and its decline has been slower. In September, it remained at 6.7%. While core inflation, excluding fuel and food costs, experienced a slight decrease, service price inflation, which is closely monitored by the Bank of England, rose.
Governor Andrew Bailey stated that these figures were in line with the Bank’s expectations. Economists predict a significant decrease in headline inflation in October, as the energy price surge from the previous year fades from the comparison. However, in August, the Bank of England forecasted that inflation would only return to its 2% target in the second quarter of 2025. The Bank is set to release updated forecasts on Thursday.
Official data indicates that the fastest pay rises in at least 22 years have only slightly eased. There are also signs that the job market is losing some of its inflationary momentum, such as slower growth in starting pay for individuals hired through recruitment agencies. However, assessing the labor market has been challenging due to issues at the UK’s statistics office in conducting surveys.
Similar to many countries, the housing market in Britain experienced a boom during the COVID-19 pandemic. Nevertheless, the increase in mortgage borrowing costs has led to a significant decline in transactions and borrowing for house purchases, further weighing on the overall economy. It is worth noting that house prices have fallen by approximately 5% since September, but this should be compared to the 25% surge from the beginning of the pandemic period to their peak.
The volume of goods purchased at retailers experienced a drop of almost 1% in the three months leading up to September. This is the first decline of its kind since early 2023 and can only be partially attributed to unseasonal weather.
Economists are concerned that the weak data increases the risk of the UK economy shrinking in the third quarter of 2023, potentially signaling the start of a recession. In October, a measure of consumer confidence sharply fell due to the pressure of rising living costs on households.
The Bank of England stated in August that it is likely to maintain high interest rates to curb inflation. Its chief economist, Huw Pill, likened the outlook to the flat and long plateau of Table Mountain. Currently, most investors seem to agree with this approach. Financial markets do not anticipate a greater than 50% chance of the Bank of England reducing the Bank Rate until August 2024. In comparison, markets expect the United States to implement its first rate cut in June, while the European Central Bank is also projected to reduce borrowing costs ahead of the Bank of England.
More detail via Reuters here… ( Image via Reuters )