Bank of England slows hiking pace
Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 3 August 2023. Past performance is never a guarantee of future performance.
The Bank of England (BoE) has announced a 14th consecutive rate rise, taking the base rate to a 15-year high of 5.25%.
The decision heaps more pain on borrowers in an already difficult year, but there are at least signs emerging that the worst may now be behind them. The 0.25% hike was the smallest since March 2023, before which there had been three consecutive hikes of 0.5% each. Today’s smaller-scale hiking suggests that Monetary Policy Committee (MPC) believes its decision-making is starting to have the desired impact.
A record high
While nothing in life is guaranteed, it was almost certain that the MPC would vote to hike again. Forecasters and commentators spent most of their time in the run-up debating the potential size of the hike, and pondering how large the BoE was prepared to go. The risk of tipping the UK economy into recession remains real, although the ongoing resilience suggests that will be unlikely (but not impossible) in 2023.
Although inflation remains stubbornly highly at 7.9%1, and far from the central bank’s target of 2%, in the end, the 0.25% hike was adjudged to be sufficient.
Tellingly, persistent UK inflation contrasts with both the US and the eurozone, where efforts to cool price pressures appear to have been more successful. Part of that can be attributed to the make-up of the UK’s inflation which is driven by both food and energy prices (albeit the latter have cooled down) and services. In other words, the BoE has been fighting multiple fires with a single hose: interest rates.
Prime Minister Rishi Sunak acknowledged the ongoing pain the day before the MPC, going on record as saying: “I know families are struggling with the cost of living and that’s why I set it out as my first priority to halve inflation, and we’re making progress. Is that as fast as I’d like? No. Is it as fast as anyone would like? No. But the numbers most recently that we had show that we’re heading in the right direction…2”
As the MPC meeting minutes stated, there are signs the domestic inflation war is being won: “. [CPI] is expected to fall significantly further, to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation. Services price inflation, however, is projected to remain elevated at close to its current rate in the near term3.”
Better times ahead?
As the MPC meeting minutes stated, there are signs the domestic inflation war is being won: “…[CPI] is expected to fall significantly further, to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation. Services price inflation, however, is projected to remain elevated at close to its current rate in the near term4.”
While borrowers will once again be feeling the pain from the news coming out of Threadneedle Street, there is some consolation at least that price rises have peaked, giving the BoE licence to reign back its rate rises.
If inflation was to fall back to 5% by the end of the year, as the BoE expects, then households, businesses, the Bank of England and the government, will breathe a collective sigh of relief. It’s too early to speculate as to when rates will decline but the current “restrictive” interest rate environment, as described by BoE itself, may not last for much longer if the central bank’s projections turn out to be true.
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