As the country fears it is entering a period of long recession, the central bank continues to increase its borrowing interest rate to keep rising inflation under control – which remains at a 40-year high of 10.7%.
On Thursday, the Bank of England (BoE) raised its borrowing interest rate on the sterling by 50 basis points (bps) to 3.5%. This is the ninth interest rate hike of the year, which is at its highest level since 2008. Members of the BoE’s Monetary Policy Committee (MPC) voted to increase the cost of borrowing after the consumer price index (CPI) in November showed an annual inflation of 10.7%, which remains at a 40-year high despite the central bank’s efforts to bring it under control.
The Committee voted 6-3 in favour of raising rates by 50 bps. While two members preferred to maintain the rate at 3%, one member voted to increase the bank rate by 75 bps to 3.75%. The MPC’s November Monetary Policy Report projects that despite inflation peaking at 11.1% and starting to come down, it is still expected to remain high going into next year due to several inflationary pressures. As a result the economy will be in recession for a prolonged period.
Rising energy prices, increasing labour shortage, steadily climbing unemployment rate, and domestic wage and price pressures were pointed out as the risk factors that were causing Britain’s economic recovery to slow down. Inflation was projected to fall sharply from mid-2023 to the BoE’s target rate of 2% in the next two to three years. Now the central bank has warned Britons that further rate hikes are to be expected next year.
“Most indicators of global supply chain bottlenecks have eased, but global inflationary pressures remain elevated. Advanced-economy government bond yields (U.S and EU) have fallen, particularly at longer maturities. There has been some reduction in UK fixed-term mortgage rates since the Committee’s previous meeting, but rates remain materially higher than in the summer.” read the report.
The BoE says that the exchange rate of sterling has appreciated by 2.75%. MPC members are now expecting the UK’s gross domestic product (GDP) to decline by 0.1% in the fourth quarter of 2023, which is 2% more than what was projected in the November report. There is also a considerable drop in new investments in the country.
Although labour demand has begun to ease, job markets show that wage growth reduced by 4.2% in the third quarter of this year, which is the second lowest in the country’s history. However, wage growth in the private sector rose by 6.9%, which is 0.5% stronger than expected in the BoE’s report. According to data from the Office for National Statistics (ONS), the unemployment rate for this year rose to 3.7% in the three months from October, up by 0.1% from the second quarter of 2022. Job vacancies fell by 65,000 between September and November to reach 1.9 million.
Regular wages, excluding bonuses, rose by 6.1% in the last quarter as companies are under increased pressure to hike their payments to employees. However, when the current inflation rate is taken into account, wages have fallen by 3.9% which is reflected in the high living costs.
Inflation started to slow down after the Rishi Sunak government introduced the Energy Price Guarantee (EPG), a scheme that will cap household unit energy prices at £3,000 per year from April 2023 to March 2024. But, the bank noted that household energy bills are continuing to rise as the winter sets in. The war in Ukraine is disrupting supply of gas and some food items, which is adding to inflationary pressure as the cost of these items continue to rise. These factors are keeping inflation on the high for longer.
“CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison.”
The Bank of England says there are considerable uncertainties around the outlook that its Committee will continue to keep a close watch on. If the outlooks suggest higher inflationary pressures, then the central bank will have to continue to raise interest rates until it can bring the economy under control.