Last month, the Bank of England (BoE) sanctioned a further increase in its benchmark interest rate as inflation continues to surge significantly ahead of the Bank’s target level.
Following a meeting held in mid-March, the BoE’s nine-member Monetary Policy Committee (MPC) voted by an 8-1 majority to raise Bank Rate from 0.5% to 0.75%. This was the third meeting in a row that the MPC had signalled a tightening of monetary policy, taking the Bank’s main interest rate back to its pre-pandemic level.
Policymakers cited a strong labour market and continuing signs of ‘robust domestic cost and price pressures’ as key reasons for the hike. Minutes to the meeting also noted that Russia’s invasion of Ukraine had led to ‘further large increases in energy and other commodity prices including food prices.’ As a result, the BoE now expects inflation to reach ‘around 8% in April,’ almost a full percentage point higher than it forecast in February and four times its 2% target figure.
While the minutes did say that ‘some further modest tightening in monetary policy may be appropriate in the coming months’ they also pointed to concerns about the outlook for growth as households struggle with a squeeze on incomes. Indeed, analysts noted a more dovish tone than was evident in the previous set of minutes, with a distinct softening of the language on the need for future rate hikes.
Data subsequently released by the Office for National Statistics (ONS), however, showed that price rises continue to exceed analysts’ expectations. In the 12 months to February, the rate of inflation as measured by the Consumer Prices Index, surged to a 30-year high of 6.2%. This was significantly up on the previous month’s rate of 5.5%, and 0.3% higher than the median forecast in a Reuters poll of economists.
OBR downgrades growth forecast
The Office for Budget Responsibility (OBR) has downgraded its forecast for UK economic growth over the next two years amid an unprecedented squeeze on household finances.
Chancellor Rishi Sunak unveiled the independent forecaster’s revised projections during his Spring Statement, delivered to the House of Commons on 23 March. The new forecast suggests the economy will expand by 3.8% in 2022, significantly down on October’s 6.0% prediction. Next year is also expected to yield lower growth, with the economy forecast to expand by 1.8% compared to a previous prediction of 2.1%.
The downgrades partly relate to Russia’s invasion of Ukraine, which the OBR warned would have ‘major repercussions for the global economy.’ In addition, they reflect a sharp squeeze on living standards with real disposable household incomes expected to fall by 2.2% in the coming financial year – this would represent the biggest annual decline in UK living standards since records began in 1956.
Ironically, the latest gross domestic product statistics released by ONS showed the UK economy grew by a faster than expected 0.8% in January. This was the strongest monthly expansion since last June and beat all forecasts in a Reuters poll of economists.
Survey data also suggests the economy continued to expand at a robust pace during the last two months. The preliminary reading of the S&P Global/CIPS Composite Purchasing Managers’ Index (PMI), for instance, came in at 59.7 in March, only marginally below February’s historically high figure of 59.9.
S&P Global Chief Business Economist Chris Williamson said, “The further reopening of the economy after COVID-19 containment measures helped offset headwinds from the Ukraine war, Brexit and rising prices.” However, he also noted that the PMI’s measure of business optimism slumped to a 17-month low in March, adding, “Indicators point to potentially sharply slower growth inthe coming months.”