The Bank of England has set a new record for interest rate increases with a 0.25% rise, marking the 12th time that they have raised interest rates. This increase brings the interest rate to its highest level in 15 years, as part of the Bank’s ongoing efforts to combat persistent inflationary pressures in the country. The financial markets had anticipated this decision by the Bank, which has taken steps to curb inflation by increasing interest rates. Looking ahead, it is unclear what the interest rates will be in the UK in 2024, but predictions about the economic future of the country may provide some insight into what we can expect.
The interest rate increased for the twelfth time in a row
The Bank of England has raised interest rates for the twelfth time, as announced by Andrew Bailey, the governor of the Bank of England. Bailey further remarked that this increase in interest rates will have a significant impact on the country’s economy in the upcoming months, and it will be carefully considered by the British Monetary Policy Committee in their future financial decisions.
Interest rate increase with the aim of curb inflation
The BoE, like all other central banks in other countries, seeks to curb Inflation, Which has intensified since last year following Russia’s attack on Ukraine. This event led to a jump in energy prices and, as a result, increased prices for a wide range of goods and services. The Bank of England started an interest rate increase of 0.1% from the end of 2021 to prevent the rise in prices, which at that time was caused mainly by the consequences caused by the Covid-19 restrictions and the cancellation of these restrictions.
Monetary policy tightening by the Bank of England
The primary responsibility of this bank is to ensure that the inflation rate remains at 2%, but it aims to increase it to 5% by the end of the year in this country. However, the Bank of England has also indicated that if inflationary pressures persist, additional monetary policy tightening may be necessary. Currently, the UK’s inflation rate slightly exceeds 10%. In the wake of the announcement regarding the interest rate increase, the Bank of England has further stated that food prices have remained high for a longer duration than anticipated, and as a result, consumer price inflation is predicted to decrease at a slower pace.
More pressure on borrowers with an interest rate increase
An interest rate increase will pressure borrowers, especially those with no fixed interest rates or looking for new loans. UK’s economy has fared better than expected this year. However, widespread strikes and falling living costs hampered the gross domestic product in February, while the labour market remains resilient. Last week, the US Federal Reserve hiked another 25 basis points. The European Central Bank slowed its rate hike cycle last week, opting for a 25 basis point hike that lifted rates to levels not seen since November 2008, but claimed the UK inflation outlook remained too high for a long time. However, the UK will be the worst-performing major economy over the next two years, with UK inflation significantly more elevated than peer countries.
Increasing economic pressures on British households
At the end of a week full of worrisome economic developments, Chancellor of the Exchequer Jeremy Hunt was heavily criticized; because he seemed to believe that despite the pressures already placed on families by the cost of living crisis, this is a price that must be paid. Keir Starmer, the leader of the British Labor Party, said: “After thirteen years of the Tories, people don’t feel better off, and they are ready for change. Only Labour will cut crime, waiting lists and living costs. Only Labour will build a better Britain.” Jagjit Chadha, the National Institute of Economic and Social Research director, said that the UK was “in danger of engineering a recession” if interest rates continued to rise to take Inflation.
The Bank of England’s mistake in forecasting Inflation
At the UK Treasury Committee meeting, policymakers faced criticism for failing to anticipate a longer-term rise in Inflation driven by higher-than-expected food prices. Conservative MP John Baron accused the central bank of deplorable dereliction of duty that has kept Inflation from approaching the 2 per cent target; According to him, this issue causes real pain for households and businesses.
Miscalculations of economic forecasting models
Huw Pill, the Bank of England’s chief economist, admitted that the bank’s economic forecasting models had led to errors. He stated: “We are trying to understand why we have made errors in inflation forecasts.” Previously, it was thought that consumer price index inflation in the UK might drop to 1% by the middle of next year; but now it is predicted that this Inflation will reach about 3.4%.
Declining public Confidence in the Bank of England
Bank of England Governor Andrew Bailey has hit back at criticism that the bank has lost public trust over its economic modelling and interest rate decisions. In part of his speech, he stated: “I think there are huge lessons about how we operate monetary policy in the face of huge shocks.”
The inability of the Bank of England to curb Inflation
American multinational banking and financial services company Goldman Sachs has warned that the Bank of England will not be able to control Inflation until the end of 2025 due to rising food prices and alarming wage increases in the country. The Wall Street giant predicted it would take at least two-and-a-half years for British policymakers to return interest rates to the 2 per cent target from the current 8.7 per cent.
UK Inflation is higher than the target of the Bank of England
Ibrahim Qadri, the British economist at Goldman Sachs, warned that UK inflation, which has remained above the central bank’s target since August 2021, is starting to affect many goods and services. He added that considering the unpleasant situation in the labour market, we are still concerned about the risks of wage growth, which has not been sufficiently and sustainably reduced in the medium term. There is a lag of about six months between a significant producer price increase or decrease and its effect on weekly spending at stores, the Goldman Sachs analyst’s analysis shows.
Constantly increasing food inflation in the UK
This relationship suggests that supermarket prices should moderate in the future, but the decline will likely be gradual, with food prices increasing annually by at least 2.5% through 2026. The British Retail Confederation (BRC) also recently announced that shop price inflation rose to 9% this month, up from 8.8% in April.
The possibility of continued economic recession in the UK next year
Economists have cautioned British Prime Minister Rishi Sunak that the country’s economy may experience a recession in the coming year. This is primarily attributed to the anticipated need for the Bank of England to raise interest rates above 5% before the next general election, as a measure to counter the prevailing inflationary pressures in the UK. As a consequence, economists predict that the Bank of England may enact further increases in the borrowing costs for mortgages and loans, thus impacting millions of households.