The Bank of England is expected to make a potential interest rate adjustment to 5.25% on Thursday as part of its ongoing efforts to fight inflation by raising borrowing costs for the 14th consecutive time.
In light of the government’s ongoing consideration of the lingering impact of the cost of living pressures, it is expected that the Bank of England will decide to raise rates by 0.25 percentage points, thereby reaching a new peak not seen in 15 years.
The consumer price index (CPI) fell in the previous month but continued to exceed the average of most industrialized countries at 7.9%, almost four times the Bank’s 2% inflation target.
Analysts Do Not Believe in a Rate Hike
According to a recent financial center survey, economic analysts do not generally support the possibility that the Monetary Policy Committee (MPC) will adopt a more challenging approach and raise the policy rate by 0.5 percentage points.
Threadneedle Street interest rates have experienced a marked upward trend since December 2021, after a period of historically low rates. Russia’s invasion of Ukraine, which had an inflationary effect on the world economy, has been the driving force behind this adjustment.
Now Is the Time for Cautious and Measured Decisions
However, concerns over a possible slowdown in UK economic activity due to rising borrowing costs suggest that the Monetary Policy Committee (MPC) will take a cautious approach to its future actions, according to analysts.
Nationwide says the drop in UK house prices is now the fastest since 2009. At the same time, a home builder, Taylor Wimpey, says that more homeowners are extending their debt terms to deal with rising monthly costs.
The company says that market conditions got worse between April and June, and loan rates went up simultaneously. Moneyfacts says that the average fixed rate for a two-year mortgage is 6.85% and that the average fixed rate for a five-year mortgage is 6.37%.
According to the most recent business polls, the private sector in the UK and other European countries is slowing down. This is because many consumers and companies find it hard to handle the higher costs of borrowing.
The decline in export demand, especially from the Asia-Pacific region and China, has hurt the UK manufacturing industry, resulting in the lowest reading in July.
The closely watched indicator reached its lowest point in 2023, equaling the previous low recorded in May 2020 and thus extending the industry’s period of decline.
The S&P Global/CIPS UK manufacturing PMI fell to 45.3 in July, indicating a more pronounced decline from the previous month.
Prime Minister Disappointed With the Pace of Inflation Decline
Rishi Sunak expressed his disappointment at the slower-than-expected inflation decline while saying there was a glimmer of hope for individuals in the circumstances.
During a radio program hosted by LBC television, the Prime Minister, who has committed to reducing inflation by 50% by the end of the year from the current level of over 10%, expressed his understanding of the challenges faced by households in dealing with everyday expenses. The Prime Minister reiterated his commitment to address this challenge by prioritizing the reduction of inflation and assured that steps are being taken in this direction.
Is the velocity meeting the desired level? No. Is the rate satisfactory to all stakeholders? No.
However, the latest data shows a positive trajectory, a decline in inflation. There is a glimmer of hope for the future.
Labor accused Sunak of “economic mismanagement,” pointing out that he had failed to consider the possible rise in interest costs on debt due to the expected increase in Bank of England interest rates without making appropriate policy adjustments.
The proposal to use extended maturity loans suggested by Rachel Reeves, Labour’s shadow chancellor, would have effectively protected the Treasury from the recent sharp rise in interest rates. This strategic move would have significantly reduced the UK’s debt servicing costs, exceeding those of major global economies by some £56 billion. Accordingly, it would yield a tangible benefit of around £2k for every household in the UK.
According to recent statements by the Office for Budget Responsibility, an independent forecaster linked to the Treasury, the cost of borrowing in the UK has been higher than in other competitor countries because it relies on short-term lending and debt related to the Retail Price Index (RPI).
The Prime Minister’s disregard for the public finances is evident in his decision to ignore the clear warnings announced by the Speaker.
Analysts thought that the MPC would split into three groups: one member wanting to raise rates by 0.5 percentage points, another wanting to keep rates the same, and seven wanting to raise rates by 0.25 percentage points.
A senior economist at Allianz Global Investors said that the MPC is likely to soften its stance because there are signs that the economy is slowing down.
Capital Economics, a well-known economist, says that the Bank’s decision not to raise rates further will rest on how much pressure there is on the job market and how quickly the vacancy rate returns to normal.
It is estimated that a decline in the vacancy rate from 3% in May to around 2.5% is needed to bring wage growth down to the desired range of 3% to 3.5%, which is required to bring core inflation back to 2%.
A possible course of action is a modest increase in interest rates from the current 5% to about 5.5% to maintain this elevated level for about one year.
Core inflation, characterized by excluding fluctuating costs such as energy, food, and tobacco, remains at around 7%. This suggests that the service sector, which makes up a large part of the private sector, is persistently passing on substantial price increases to consumers.