Latest forecasts from the Bank say the UK will avoid recession and suggest the government is likely to meet its pledge to halve inflation by the end of the year but interest rates will have to remain higher for longer
Thursday 3 August 2023 14:16, UK
By Lucy Ashton
The Bank of England has raised interest rates for the 14th successive time, lifting its official rate to 5.25%.
The quarter percentage point increase was somewhat smaller than some economists had expected, following the release of lower-than-anticipated inflation data last month.
“Inflation is falling and that’s good news,” said the Bank’s governor Andrew Bailey.
“We know that inflation hits the least well off hardest and we need to make absolutely sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”
However, while the Bank’s forecasts do not imply a recession in the coming years, they paint the picture of an economy which is both weaker than previously forecast and effectively flatlining all the way through to 2026.
This is, said the Bank, in large part because of the fact that interest rates are expected to remain at high levels for considerably longer than markets previously anticipated.
While the Bank itself does not deliver its own interest rate forecasts, it dropped a heavy hint that it does expect borrowing costs to stay high for some time, saying in the minutes to its policy meeting that: “The [Monetary Policy Committee] would ensure that Bank Rate was sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.”
The nine-person MPC was split on Thursday’s decision, with two members – Catherine Mann and Jonathan Haskel – voting for a bigger increase and one member, Swati Dhingra, voting to keep rates on hold.
However, economists and financial markets are betting on further increases, with markets pricing in a peak of 5.75% or slightly higher.
The Bank’s forecasts indicate the prime minister is likely to meet his pledge to halve inflation by the end of the year, pointing towards a rate of around 4.9% in the final quarter (the government’s pledge implies a rate of 5.4%).
However, considerable uncertainty remains, with around a 20% chance of a higher figure.
While the Bank’s forecast for gross domestic product (GDP) growth in the year to the third quarter is slightly higher than before (0.8% rather than the 0.6% it forecast in May), it is still far weaker than what would be considered “trend growth”.
Moreover, the GDP forecast for the same period in 2024 was also cut from 0.6% to 0.3%, as was the relevant forecast in 2025 (from 0.8% to 0.3%). All told, they add up to a long period of insipid economic growth.
Chancellor Jeremy Hunt said: “If we stick to the plan, the Bank forecasts inflation will be below 3% in a year’s time without the economy falling into a recession.
Chancellor Jeremy Hunt and Labour’s Rachel Reeves and Mark Griffin.
“But that doesn’t mean it’s easy for families facing higher mortgage bills so we will continue to do what we can to help households.”
Labour’s shadow chancellor Rachel Reeves said: “This will be incredibly worrying for households across the country.”
“Responsibility for this crisis lies with the Tories. They’ve crashed our economy leaving working people worse off.
“Labour’s plans will boost growth and get bills down.”
Following the announcement today of the Bank of England’s 14th consecutive interest rate rise, Scottish Labour Housing Spokesperson Mark Griffin said: “This increase will be absolutely devastating and will push those already struggling with mortgage rate increases to the brink.
“The fact that homeowners will be expected to fork out hundreds more a month is simply shocking and is completely unsustainable.
“Scots across the country are struggling more and more, but their two governments appear to be missing in action when support is needed most.
“Only Scottish Labour has a proper plan to support homeowners through these mortgage bombshells, with our Mortgage Rescue Scheme and by strengthening the support required from lenders and making it mandatory to provide support to those facing repossession.”