Interest rates go up again in inflation fight
THE Bank of England has raised interest rates for the tenth time in a row, lumping further pressure on mortgage borrowers.
Decision makers on the Bank’s Monetary Policy Committee (MPC) opted to hike the base rate from 3.5% to 4%, to help bring down double-digit inflation.
The Bank said that the UK is still headed for a recession, but stressed that the economic downturn could be shallower and shorter than previously expected.
Peak-to-trough gross domestic product (GDP) is set to shrink by 1%, from around 3% in an earlier forecast.
This is because wholesale energy prices have fallen significantly since the MPC produced its last forecast, in November, and inflation has begun to fall from its peak last year.
The UK will suffer a recession of five consecutive quarters, starting in the first three months of 2023.
But the decline will be much softer than in previous recessions, such as during the 2008 financial crisis.
Governor of the Bank of England Andrew Bailey, has said that it is “too soon” to declare victory over inflation.
He said that consumer prices index (CPI) inflation is expected to fall below the Bank’s 2% target rate in the spring of 2024, as long as energy prices fall as expected.
“It is too soon to declare victory just yet. Inflationary pressures are still there,” Mr Bailey said.
He continued: “The extent to which inflationary pressures ease will depend on the evolution of the economy and the impact of the significant increases in Bank Rate so far.
“If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required.”
But he said that the Monetary Policy Committee had softened its language on future rises in interest rates because the economy is turning a corner on inflation.
“I think that reflects that we have seen a turning of the corner, but it’s early days and the risks are very large. And it’s really that which shapes where we go from here.
“If those risks emerge and if we continue to get overshoots as we’ve seen, particularly in the wage settlement data and services inflation, then we will have to respond to that, because that would be evidence that these risks are crystallising.
“If the economy were to evolve as the central case of the forecast suggests then we would have to re-evaluate as we always do.”
GDP is expected to fall by 0.5% over 2023, and by 0.25% in 2024, before picking up to almost 1% by 2025.
The outlook for the labour market has also improved, the MPC said.
The number of job vacancies is set to decline and redundancies will remain low, as companies are less inclined to let staff go as quickly as they did in previous recessions, the Bank suggested.
The rate of unemployment is expected to peak at 5.25%, lower than the 6.5% that was previously forecast.
A lower rate of unemployment and therefore greater job security indicates that people have more confidence to spend.
Yet workforce participation has weakened as over-50s have been exiting the workforce since the pandemic, reports suggest.
The MPC said some of these people look to be returning to the labour market, but many may not come back.
Markets expect interest rates to peak at 4.5% towards the end of this year, which is significantly lower than the 5.25% peak that had been forecast when the MPC met in the wake of the mini-budget. Rates will then stay above 3.25% for at least the next three years, according to the forecast.