Business news 12 May 2023
James Salmon, Operations Director.
BOE raises rates to 4.5%. And more business news.
BOE raises rates to 4.5%
Persistently high inflation forced the BOE into its 12th rate hike in a row, up 0.25% to 4.5%, the highest rate since 2008. It said further increases may be needed if inflationary pressures continue
The BOE raised both its growth and inflation forecasts. it now expects inflation to fall to 5.1% compared to the 3.9% it predicted in February. It also estimates that the country will avoid recession and that there will be a smaller increase in unemployment.
The pound had weakened on Thursday morning before the announcement but quickly bounced back to be largely flat. Sterling’s response to BoE rate hike has surprisingly been somewhat ambivalent. Despite the BoE’s openness to further tightening and a rosier economic outlook, it’s forecast for inflation indicates a marked downturn, with a “material” undershooting expected in the forecast horizon. The voting pattern held no surprises with only 2 voting against, leaving the Pound now turning its attention to today’s GDP data for potential directional cues.
The UK stock market was broadly flat.
The BoE revised up its growth forecasts from gloomy numbers released in February, but it also now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. The BoE predicts inflation will not return to its 2% target until early 2025. Consumer price inflation is predicted by the central bank to fall from the current level of 10.1% to 5.1% in the fourth quarter of 2023, instead of its previous forecast of 3.9%.
“We have to stay the course to ensure inflation falls all the way back to our target,” said BoE governor Andrew Bailey. “We expect inflation to fall quickly this year.”
Yael Selfin, chief economist at KPMG UK, said: “The continued tightening of credit conditions will provide few sighs of relief across the economy, as rate increases over the past year will be felt by households and act as a constraint on growth in the near term.”
Elsewhere, Thomas Pugh, UK economist at RSM, says the BoE is guilty of making a string of miscalculations based on poor modelling and a “failure of imagination”.
The National Institute of Economic and Social Research
Think tank, the National Institute of Economic and Social Research (NIESR) has said Prime Minister Rishi Sunak will struggle to meet his target of halving inflation this year and has complicated the Bank of England’s job by putting that onus on them, saying the pledge itself was ill-conceived. The whole idea complicated the Bank of England’s job because it “created a focal point of 5%” for price and wage expectations.
Experts criticise Bank of England’s rate rise
Experts have criticised the Bank of England’s decision to raise UK interest rates again, stating that the pain of higher rates has yet to be widely felt by households across the country. The Bank estimates that just a third of the impact has passed through so far, as there is a much higher proportion of people tied to fixed-rate mortgages. The average mortgage holder could see their monthly interest payments jump by around £200 a month if they fixed to a new rate this year.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said the Bank risked “overdoing” rate rises, which could compound the cost of living crisis for many. The IPPR think tank argued the Bank should have held off raising interest rates again, warning of a “continued increase in inequality”.
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