Interest rates to remain higher for longer, Bank of England signals

ITV News' Economics Editor Joel Hills has the latest on the mixed outlook for interest rates

If in doubt, keep pedalling.

The headline annual rate of inflation in the UK eased sharply in June, energy bills are starting to fall (well, the unit cost of energy anyway) and food price inflation appears to be peaking.

There are good reasons to be hopeful that inflation will fall with greater velocity in the months ahead but the Bank of England continues to crack the whip, forcing-up the cost of borrowing.

The Monetary Policy Committee (MPC) voted 9-3 to raise interest rates by 0.25%. Two members voted for 0.5%. One member - Swati Dhingra - wanted to pause.

The Bank’s worry here is that there are still an unusually high number of vacancies in the economy and that pay is rising at a level that suggests inflation is feeding itself domestically.

Private sector wage growth in the three months until May ran at 7.7%. The Bank’s concern is companies will fund these pay increases by raising their prices again.

“The risks from more persistent inflationary pressures may have begun to crystallise,” the Bank notes in its minutes.

The Bank’s forecast is based on the market assumption that interest rates, now 5.25%, peak above 6%. The MPC is doing very little to challenge that view.

The minutes contain a promise to “ensure that Bank Rate was sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term”.

Anyone with a mortgage, be warned.

In the last eighteen months, interest rates has risen aggressively in an attempt to douse down white hot inflation.

Once upon a time, loads of people had mortgages and most of them were on floating rates. Higher interest rates bit hard and immediately. Now there are fewer mortgages and most rates are fixed.

The Bank of England believe that we've only experienced a third of the impact of all the interest rate rises we've had to date, explains ITV News' Economics Editor Joel Hills

The Bank thinks only a third of the impact of higher rates has been felt so far and it is for that reason that the crowd urging the MPC to stop and wait has grown.

In the last two months, Andy Haldane (the Bank’s former chief economist), Mervyn King (its former governor) and David Miles (once on the MPC, now at the OBR) have joined the chorus.

Haldane warns that continuing to tighten risks “[propelling] a brick towards the financially vulnerable” and “sacrificing many thousands of jobs for negligible benefit.”

But the Bank is pressing on.

“We know that inflation hints the least well off the hardest and we need to make absolutely sure that it falls all the way back to the 2% target,” explains the Governor, Andrew Bailey. A man who has paid his own mortgage off.

Back in January, when the headline rate of inflation was running at 10.2%, the government made a promise to halve inflation by the end of the year.

The Bank thinks that target will probably be hit. It forecasts inflation to be at 4.9% in December, although if the Bank is right it’s hard to see how the government will be able to plausibly take any of the credit.

It terms of the Bank’s official, more meaningful, inflation target, the Bank thinks it will it take until the spring of 2025 to get back to 2%.

The data clearly show that the headline rate of inflation and core inflation in the UK is significantly higher than in other countries.

As a result, while the European Central Bank and the Federal Reserve are stating clearly that interest rates are probably peaking in Europe and the United States, the message from the Bank of England is “higher for longer”.

The big picture, if you are a prime minister or a chancellor hoping for re-election, isn’t pretty.

The Bank’s forecasts suggest that a recession will be avoided but economic growth will be anaemic at best for the next few years (averaging 0.5%/year).

The Bank expects inflation to fall but households are unlikely to be feeling materially better off.

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