Minutes explaining today’s rate decision show the latest data from lenders showing house prices have eased this autumn, after soaring during the pandemic. They say: Although the UK’s official house price index had risen strongly in October, house prices had fallen quite sharply in the Nationwide and Halifax indices in October and November. November’s RICS survey had shown further declines in price balances and continued weakness in indicators of housing market activity. According to higher-frequency Zoopla data, the volume of offers made on properties by potential buyers had fallen below their normal seasonal levels. Updated at 12:56 GMT Important events BETA filters Key events (19) Bank of England (21) UK (16) MPC (11) SNB (6) US (6) Higher interest rates will weigh on UK economic growth, notes Tommaso Aquilante, deputy director of economic research at analyst firm Dun & Bradstreet: “The Bank of England’s decision to raise the UK’s key interest rate to its highest level since October 2008 will have significant implications for businesses of all sizes across the country. By making borrowing more expensive, the increase, along with other factors, will slow economic growth. “Amid the volatile economic climate, companies need to keep their heads above water and ensure they have a big picture view of the health and longevity of their supply chain, financial pipeline, who their partners are and what the end user is looking for. As preparedness in these areas will ultimately help them weather the storm.” Chancellor Jeremy Hunt says it is important to bring inflation down to the Bank of England’s 2% target. Responding to today’s rate hike, Hunt says: “High inflation, exacerbated by Putin’s war in Ukraine, continues to plague countries around the world, eating away at people’s wages and driving up food and energy prices. “I know this is difficult for people at the moment, but it is vital that we stick to our plan, working with the Bank of England as they take action to bring inflation back to target. “The sooner we catch inflation the better. Any action that risks embedding permanently high prices into our economy will prolong the pain for everyone, hindering any prospect of economic recovery.”
BoE: Labor market still tight
Bank of England policymakers remain concerned that inflationary pressures are building in the economy – citing recent price and wage rises. MPC says: The labor market remained tight and there were signs of inflationary pressures on domestic prices and wages that could indicate greater persistence and thus warrant a further accommodative monetary policy response. This week’s unemployment report showed regular wages rose a higher-than-expected 6.1 percent in the August-October period, the biggest increase since records began in 2001. The Bank of England is walking a narrow path as it tries to contain inflation without triggering an even deeper recession, says Josie Dent, Managing Economist at think tank CEBR. In particular, by raising interest rates, the Bank is raising costs for the millions of households who will face higher mortgage costs from next year. This will mean that many of these households will have to cut back on spending in other areas, leading to weaker economic activity. However, concern was expressed today that a tight labor market could lead to more persistent inflation, justifying further interest rate hikes.” The pound extended its losses against the US dollar after the Bank of England’s interest rate decision. Sterling has now lost 1.2 cents to $1.23 – its lowest level since Tuesday, and further off yesterday’s six-month highs. The fact that two MPC members voted to keep rates unchanged, while only one wanted a bigger rate hike, weighs on the pound.
The European Central Bank is also raising interest rates by 50 basis points
In Frankfurt, the European Central Bank followed the Bank of England – and the US Federal Reserve – in raising interest rates by half a percent. Says: The Governing Council decided today to raise the ECB’s three key interest rates by 50 basis points and, based on the substantial upward revision of the inflation outlook, expects to raise them further. In particular, the Governing Council considers that interest rates will need to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the medium-term target of 2%. This raises the interest rate on the ECB’s main refinancing operations to 2.5%. Updated at 13:21 GMT
How high will UK interest rates go?
Economists agree that UK interest rates are likely to rise further in the coming months, but disagree on where they will peak. Thomas Pugh, economist at audit, tax and advisory firm RSM UK predicts that interest rates will reach 4.5% in 2023. The smaller 50 basis point increase, which takes interest rates to 3.5%, the highest level in 14 years, signals the end of the BoE’s tightening cycle. However, the minutes of the meeting made it clear that although the end is in sight, there is still more hiking to do. We expect interest rates to rise to 4.5% early next year and not start falling again until early 2024. Paul Dales of Capital Economics also predicts the Bank will raise rates to 4.50% early next year before cutting them to 3.00% in 2024. There were three ways in which this looked somewhat like another “pigeon” from the Bank. First, in November seven members of the MPC supported the 75 bps hike. Today only six members voted for the 50 bps increase. Catherine Mann voted 75bps. But Swati Dhingra and Silvana Tenreiro both voted for no change. They said “the current setting of the bank rate was more than adequate”. Second, the quote from the statement in November about the risks to inflation turning upwards was rejected. Third, the Bank dropped the segment that strongly pushed the market pricing that rates would rise to a ceiling of 5.25%, but that may simply be because market rate expectations have since fallen back to 4, 50% However, ING analysts expect rates to peak lower at 4%. In a note to clients, ING developed markets economist James Smith says: For now, our best guess is that the Commission implements another 50bp hike in February before calling it a day. Hawks can continue to point to a 6% rise in wages and the fact that core services inflation is higher than expected in November. But today’s meeting is a further demonstration of the delicate balancing act the BoG faces between mitigating the risks of a tight labor market on the one hand against growing concerns about the housing market and the health of corporate borrowers on the other. We expect Bank Rate to peak at 4% in the new year, although we are not yet convinced that rate cuts will follow as quickly as in the US (where we expect cuts shortly after the summer). [email protected] says the Fed’s attention has given the Bank of England cover to slow rate hikes as well. We expect Bank Rate to peak at 4% next year, but we’re not convinced a rate cut will follow as quickly as in the US (where we expect cuts after the summer).https://t.co/KmJFqb9q3g — ING Economics (@ING_Economics) December 15, 2022 The Unite union has slammed today’s rate hike, saying it will hurt workers. Unite general secretary Sharon Graham says: “The leadership of the Bank of England continues to make the wrong choices. First, they call on workers not to ask for wage increases. Now, they are causing even more pain during this cost-of-living crisis, while speculators, who are the real drivers of inflationary price increases, are once again let off the hook. “Millions are already struggling and by raising interest rates further the Bank of England is adding to that pain. For many this rise could be the straw that broke the camel’s back. The Bank of England does not need to do this and its leadership should be held accountable for the consequences.” A chart showing how the Bank of England raised the UK’s key interest rate to 3.5% The Bank, however, would argue that it is trying to reduce inflation – which has reduced real incomes this year.
IoD: Bank must not prolong pain
The Institute of Managers has warned the Bank of England against tightening monetary policy too tightly as it tries to reduce inflation. Kitty Ussher, IoD Chief Economist, says: “From a business perspective, if higher interest rates are needed now to stabilize prices in the future, then the resulting ‘necessary recession’ should be as short and shallow as possible. “With the labor market starting to turn around, the economy already shrinking and base effects from last year’s price rises expected to automatically reduce next year’s headline inflation, it is important that the Bank does not tighten too much and risk prolonging the pain . Not only would it be bad news for households and businesses, but it would also risk the Bank downgrading its own inflation target going forward. “Overall, while today’s rise may be justified, given the long lag between rate hikes and the impact on demand, we may soon reach the point where enough has been done.” OK to raise rates again today, but @bankofengland now has to make sure it doesn’t go overboard. From a business (and household) perspective, this “necessary recession” should be as short and shallow as possible. https://t.co/hWNTJnbBdo — Kitty Ussher (@kittyussher) December 15, 2022 Here’s some early reaction to the Bank of England rate hike, from James Smith of the Resolution Foundation: As expected, @bankofengland raised Bank Rate by 0.5ppt, taking rates to 3.5% (the highest…
