Bailey denies trying to cause UK recession
Bank of England governor Andrew Bailey has denied that the UK’s central bank is looking to trigger a recession as it tries to cool inflation.
In an interview with Sky News, Bailey said the Bank raised interest rates to 5% today because inflation looks much more persistent, although he still thinks it will “come down markedly” this year.
But he insists that the BoE is not seeking to precipitate a recession, saying:
We’ve got an economy that is much stronger and more resilient than we expected it to be. Part of that is because energy prices have come down so much, which is good news. It’s good news.
So we’re not we’re not expecting, or desiring a recession. But we will do what is necessary to bring inflation down to target.
[Yesterday, JP Morgan economist Karen Ward said the Bank needs to “create a recession” to cool demand, and price rises].
Q: Will you apologise for continually failing to forecast the sharp rises in UK inflation? What went wrong with your forecasting?
Bailey replies that the Bank has already announced it will hold an external review of its forecasting. He says forecasting has been very difficult in “an era of such big things going on around us”, such as the Ukraine war and the Covid-19 pandemic.
Bailey insists that the Bank has taken “decisive action” by raising interest rates since December 2021.
I would say, though, that within this in terms of tackling inflation, we’ve now raised interest rates by nearly 5% in 18 months. So we’ve taken decisive action.
Q: Markets think there will be more rate hikes to come. Is that fair?
Bailey says the Bank will respond to evidence. It’s not signalling what will come next, but it was “absolutely imperative” that it took action today.
Q: Is the UK an outlier on inflation, and why?
Bailey argues that core inflation looks sticky across a lot of countries.
Key events
Analysts at Berenberg Bank predict the Bank of England will spend next year cutting interest rates.
Berenberg now expect UK interest rates to peak at 5.5% by September, before the BoE shifts into loosening mode, and cuts rates back to 4% by the end of 2024.
They say:
The more pain the BoE inflicts on mortgage holders now, the more it may have to take back later on.
The European Economic team at Nomura have warned that the Bank of England risks becoming “the fool in the shower”.
That’s not a garbled reference to a Led Zepplin classic, but rather to the idea that any stimulus to the economy should be turned up or down slowly, so you can judge the effect, rather than going wild with the taps.
Nomura say:
We have added an extra hike to our profile and now see the Bank tightening in August, September and November for a peak of 5.75%.
Markets are looking for around a 6.10% peak by early next year.
Looking beyond that, with rates being raised further than we had originally expected, more rate cuts would be ultimately required to return Bank Rate back to neutral as and when inflation starts to behave. That would be a nice outcome indeed – the Bank being able to slowly return Bank Rate to neutral after declaring ‘job done’ on inflation.
The bigger risk, however, is that in the words of Milton Friedman (and more recently Silvana Tenreyro) the Bank ends up being the ‘fool in the shower’ and hikes too much, requiring a swifter correction should recession ensue.
Sunak: We will get through inflation battle
Prime minister Rishi Sunak has pledged that “we are going to get through” the UK’s inflation squeeze.
Speaking at Kent at a PM Connect, Sunak says he knows people will be anxious about today’s interest rate increase.
He adds:
I’m here to tell you that I am totally, 100% on it. And it is going to be OK and we are going to get through this and that is the most important thing I wanted to let you know today.
Sunak is then asked….
Q: Is recession a price worth paying to get inflation down?
Sunak says people expected the economy go to into recession this year. That did not happen. That is partly why the inflation challenge is harder, he says.
He says halving inflation is the right priority.
My colleague Andrew Sparrow’s Politics Live blog has full details.
Sunak says he is ‘totally, 100% on it’ and, in battle against inflation, ‘we are going to get through this’ – https://t.co/hmy6XRVWX8
— AndrewSparrow (@AndrewSparrow) June 22, 2023
Bailey warns against “unsustainable” wage and price rises
BoE governor Andrew Bailey has warned companies against raising prices to rebuild their profit margins, and cautioned that pay growth is too strong.
During his interview with Sky News today, he is asked:
Q: You talk in the minutes of this month’s meeting that wage growth is too strong – so are people asking for too large wage settlements right now?
Bailey says this is an important issue, so he wants to be “very clear”:
“We have got to get, and we will get, inflation back to its [2%] target.
To do that, we cannot continue to have the current level of wage increases. And we can’t have companies seeking to rebuild profit margins, which means prices continue to go up at their current rates.”
Bailey added that the Bank does expect inflation to come down.
And it’s important than that price setting and wage settling reflects that because the current levels, I’ll be absolutely honest, are unsustainable.
[Data last week showed that regular pay (excluding bonuses) was 7.2% among employees in February to April 2023, the highest on record outside of during the Covid-19 pandemic].
The Bank has found itself in hot water over this issue. Bailey himself was heavily criticised for saying last year that workers should refrain from asking for inflation-matching pay rises.
Last month, he rebuked chief economist Huw Pill for saying people and businesses should accept they are poorer now because of inflation.
Bailey denies trying to cause UK recession
Bank of England governor Andrew Bailey has denied that the UK’s central bank is looking to trigger a recession as it tries to cool inflation.
In an interview with Sky News, Bailey said the Bank raised interest rates to 5% today because inflation looks much more persistent, although he still thinks it will “come down markedly” this year.
But he insists that the BoE is not seeking to precipitate a recession, saying:
We’ve got an economy that is much stronger and more resilient than we expected it to be. Part of that is because energy prices have come down so much, which is good news. It’s good news.
So we’re not we’re not expecting, or desiring a recession. But we will do what is necessary to bring inflation down to target.
[Yesterday, JP Morgan economist Karen Ward said the Bank needs to “create a recession” to cool demand, and price rises].
Q: Will you apologise for continually failing to forecast the sharp rises in UK inflation? What went wrong with your forecasting?
Bailey replies that the Bank has already announced it will hold an external review of its forecasting. He says forecasting has been very difficult in “an era of such big things going on around us”, such as the Ukraine war and the Covid-19 pandemic.
Bailey insists that the Bank has taken “decisive action” by raising interest rates since December 2021.
I would say, though, that within this in terms of tackling inflation, we’ve now raised interest rates by nearly 5% in 18 months. So we’ve taken decisive action.
Q: Markets think there will be more rate hikes to come. Is that fair?
Bailey says the Bank will respond to evidence. It’s not signalling what will come next, but it was “absolutely imperative” that it took action today.
Q: Is the UK an outlier on inflation, and why?
Bailey argues that core inflation looks sticky across a lot of countries.
Sushil Wadhwani, a member of Jeremy Hunt’s Economic Advisory Council, has praised the Bank of England’s decision to hike interest rates yet again.
Wadhwani, a former member of the interest rate-setting MPC, believes the Bank is learning the lessons of recent months, having acted too cautiously on rates.
Speaking to BBC Radio 4’s World at One programme, he said:
“I think the Bank took the view that a stitch in time saves nine.”
He suggested the Bank “essentially brought forward” rate rises:
“It is the first time in this hiking cycling that they have surprised in a more hawkish direction.
“I would certainly welcome it.”
Boe Governor: I know this hurts, but inflation is still too high
Andrew Bailey, the governor of the Bank of England, has released a video clip explaining why the Bank has raised UK interest rates to 5%.
He says:
We’ve taken this decision because unfortunately, inflation is still too high. The good news is our economy is doing better than we thought it might. Inflation has begun to fall and unemployment is very low.
But recent data has shown us that further decisive action is needed in order to be sure we get inflation back down. And that’s why we’ve acted today.
Bailey is right that inflation is lower than October 2022, when it hit 11.1%, But it was unchanged in May at 8.7% (one piece of the ‘recent data’ he cites).
Bailey continues by pledging that the Bank will “continue to do whatever is necessary” and warns that it would be a mistake to let inflation stay high.
The BoE governor says:
I know this is hard. Many people with mortgages or loans will be rightly worried about what these changes mean for them. But if we don’t raise rates now, high inflation could stay with us for longer and inflation hits all of us, particularly those who can least afford it.
Raising interest rates is the best way we have of getting inflation back down to the 2% target.
Pound is ‘rabbit in headlights’ after rate hike.
The pound has dipped a little against the US dollar, to $1.275, after today’s large hike in UK interest rates.
In normal times, higher interest rates at home make the Pound worth more abroad.
But we are living through “far from normal times”, says Simon Phillips, managing director at the travel money firm No1 Currency.
Phillips explains::
Rather than sending sterling soaring, today’s bigger than expected jump in interest rates has left the Pound like a rabbit in the headlights.
Sterling has been fluctuating wildly as global investors decide whether buying Pounds is still a good bet with so much uncertainty surrounding the UK’s economic prospects.
“Nevertheless the Pound is still hovering close to a 14-month high against the US Dollar, and this week it hit its highest level against the Euro since last August.
Britain’s blue-chip share index is on track to close at its lowest level since the start of June, after today’s interest rate hike.
The FTSE 100 is down 85 points, or 1.12%, at 7474 points, as traders anticipate that higher interest rates will weaken the economy – possibly causing a recession – and suppress demand.
Housebuilders, such as Persimmon (-3.7%) and Taylor Wimpey (-3.1%) are among the fallers, along with property portal Rightmove (-3.5%)
The domestically focused FTSE 250 index, which includes more UK companies than the FTSE 100, has shed 1.75%. Commercial property firm British Land are the top faller, down 5.8%.
Fiona Cincotta, Senior Financial Markets Analyst at City Index, says the FTSE “crashed lower” after the Bank of England voted 7-2 to hike interest rates by 50 basis points to 5%.
Cincotta explains:
This was the first jumbo rate hike from the central bank since February and came despite the market only pricing in a 40% probability of such a large move.
After yesterday’s inflation shock, with core inflation showing that it still hasn’t peaked, the central bank felt it needed to act aggressively to show that it is serious about fighting inflation. I think there was a fear among policymakers that if they didn’t go big, the price/wage spiral could strengthen.
After taking interest rates to 5% and signalling that there could be more hikes to come, the UK economy is more likely to fall into a recession – perhaps what the BoE is after to ensure that inflation expectations don’t become embedded.
While the pound is rising now, gains are limited, which is a reflection of those recession fears; the outlook for sterling is weaker across the year. As the likelihood of a recession rises, the pound is likely to come under pressure.
The FTSE is also feeling the pain, dropping over 1%, with housebuilders and consumer discretionary stocks under pressure amid the prospect of higher mortgage rates and lower disposable income.
Rates to hit 6% and stay there until May
UK interest rates are forecast to hit 6% by the end of this year, and stay there until May 2024, following today’s half-point increase in borrowing costs.
The mortgage market is “a horror show” for anyone whose fixed rate deal ends in the next few weeks, says Laura Suter, head of personal finance at AJ Bell.
Around 800,000 homeowners will need to re-mortgage before the end of the year, Suter points out, adding:
Many who fixed two years ago are facing the prospect of a tripling of their mortgage interest, which will add hundreds of pounds to the average monthly mortgage bill.
“The worst thing a homeowner can do right now is bury their head in the sand and just let their fixed-rate deal end. The Standard Variable Rates that mortgage lenders charge those who have come off their fixed deal are truly eye-watering now, standing at 7.5% on average* – even one month of mortgage payments at that rate could be crippling to someone’s finances.
Mortgage holders who chose to move to a standard variable rate deal, or a tracker, are also being “clobbered”, Suter points out.
Bank of England super-hike sparks volatility in the markets
As predicted, there has been volatility in the financial markets after the Bank of England lifted UK interest rates to 5%.
UK short-term bond prices have gyrated. Initially, the yield (or interest rate) on two-year government bonds dropped – which would be a relief to mortgage holders, as fixed-term loans are priced off those rates.
One observer compares this move (a rise in bond prices) to an emerging-market economy trying to regain credibility.
Gilts ripping after the 50bp hike: classic EM “regained policy credibility” price action ????
— Alex (@Econosave) June 22, 2023
However, two-year bond yields have since moved higher again, as investors anticipate further interest rate increases in future months.
The pound has been choppy too. It jumped by half a cent against the US dollar as the news of the large interest rate increase was announced, only to then sink by a cent, and then rise back towards where it started…
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:
The decision has sparked a fresh round of turbulence, with 2-year gilt yields falling back below 5% then shooting back above recent highs to over 5.1% as uncertainty reigns about how far rates will go. Investors are trying to assess whether today’s big bazooka now, might be enough to stem further rate hikes or whether more will still be necessary.
The pound has had a case of the jitters, rising sharply to 1.283, before losing ground again to 1.276. Volatility is set to remain the order of the day as investors assess what impact this hawkish move will have on the UK economy.
Reeves: households need support through cost of living crisis
Families across Britain will be “desperately worried” about what today’s interest rate rise might mean for them, says Rachel Reeves MP, Labour’s Shadow Chancellor.
Reeves adds:
“They want to know that support will be there if they need it.
“Instead the Chancellor and Prime Minister are burying their heads in the sand and failing to clean up the mess this Tory government has made.
“Labour’s five-point plan to help ease the Tory mortgage penalty and our Renters’ Charter would provide practical help right now.
“Longer-term, Labour will build a stronger, more secure economy and get it growing again.”
Money Advice Trust: interest rate rise “piling more pressure” onto struggling households
Today’s interest rate increase will pile more pressure onto struggling households, fears the Money Advice Trust, the charity that runs National Debtline and Business Debtline.
Jane Tully, director of external affairs and partnerships at the Money Advice Trust, says the 13th interest rate rise in a row comes as some borrowers are already struggling.
For homeowners whose monthly repayments have increased, the strain is already starting to show – with one in five saying they are already having trouble affording repayments.
Higher mortgage costs also lead to higher rents, making this an incredibly worrying time for many tenants.
She urges lenders to provide support (a message the government may hammer home when Jeremy Hunt and Rishi Sunak meet with UK banks).
Tully says:
“Lenders already have a range of options they can use to help people in difficulty with their mortgage. However, lenders, regulators and government must act to ensure these options, like switching to interest-only for a short period, payment holidays and extending mortgage terms, are readily available to anyone who needs them. This must include giving people flexibility to reverse any changes if and when someone’s situation improves.
“Anyone worried about their mortgage payments should speak to their lender. Help is also available from free debt advice services like National Debtline.”
BoE finally feels the inflation burden and cuts to the chase with a leap of 0.5% leaving interest rates, for this month, at 5%.
For those looking to remortgage in the coming months or tracking the base rate they will notice the lack of change in their back pocket. pic.twitter.com/5TcxVOTisC— Emma Fildes (@emmafildes) June 22, 2023
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