Bank of England governor denies trying to trigger recession after hiking interest rates to 5% – as it happened
Chris Beauchamp, chief market analyst for IG, said fears that high interest rates will cause a recession hit share prices:
“The FTSE 100 has fallen to a three-week low today as investors worry about the impact of more rate hikes on the UK economy.
“The losses are even more pronounced on the mid-cap FTSE 250 due to its UK exposure.
“A recession in the UK now seems an inevitability with the Bank of England committed to more rate hikes, and at a faster pace.
“Everything is now subordinate to the task of getting inflation under control, with heightened recession risk accepted as a necessary evil.”
A nod to ‘persistent inflation’ should put everyone on notice that Bailey and co have overcome their reticence about more aggressive hiking.@chrisb_ig spoke to @ReutersUK after the latest BoE hike https://t.co/8r4ab82j45
— IG (@IGcom) June 22, 2023
Closing post
The governor of the Bank of England has denied aiming to create a recession, in an attempt to cool the UK’s inflation problem.
After lifting UK interest rates to the highest level since 2008 at noon today, Andrew Bailey said:
We’ve got an economy that is much stronger and more resilient than we expected it to be. Part of that is because energy 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.
Bailey also declared that the current level of wage increases, and rises, are not sustainable with the Bank’s goal of lowering inflation.
Insisting that the Bank expects inflation to fall, he added:
And it’s important than that price setting and wage settling reflects that because the current levels, I’ll be absolutely honest, are unsustainable.
We cannot continue to have the current level of wage increase
Bank of England Governor, Andrew Bailey, says the current levels of price setting and wage setting are unsustainable, after the BoE raises interest rates to 5%.https://t.co/DCDDclZeFy
At noon today, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008. Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
Amid a growing sense of alarm over stubborn inflationary risks, the MPC said:
“There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”
The Bank said that it would continue to watch for persistent inflationary risks, and would push interest rates higher if necessary.
This latest rate rise makes it clear the Bank of England “means business” when it comes to tackling inflation, said professor of global economy and deputy dean of Cranfield School of Management, Joe Nellis.
Unfortunately, further financial hardship is expected for many millions of households. and those at the lower end of the income scale with variable rate mortgages, or who are in the process of re-mortgaging, will be hit the hardest.
Rishi Sunak insisted after the decision that his government would “remain steadfast in its course” to curb inflation. The prime minister faces growing calls to intervene as millions of households feel the strain from surging mortgage costs.
“The reason interest rates are going up is because inflation is too high,” he told the Times CEO summit. Sunak added:
“This is something that makes everybody poorer, that’s what inflation does. That’s why we’ve got to grip it, we’ve got to reduce it and interest rates are a part of that.
“Now, I always said this would be hard – and clearly it’s got harder over the past few months – but it’s important that we do do that.”
The financial markets now indicate there is a 33% chance that the Bank unleashes another half-point hike in August, taking interest rates to 5.5%. Bank rate is expected to hit 6% by the end of this year, and remain there until next June.
Chancellor Jeremy Hunt backed the Bank of England’s move, saying that high inflation is “a destabilising force eating into pay cheques and slowing growth”.
Unions criticised the Bank’s move, with the TUC blaming “dangerous groupthink in the Bank of England and Downing Street”.
The Green Party called for a wealth tax, to fund more support for struggling households and those on benefits.
There was also drama in Turkey, where the central bank almost doubled interest rates.
The Central Bank of Turkey raised interest rates for the first time in more than two years, from 8.5% to 15%, lower than some economists had forecast. The lira hit a record low afterwards.
Shares in Ocado have soared, amid market speculation that the online supermarket and retail technology group could be the target of a takeover.
A fresh round of rail strikes is set to disrupt national networks during July, after the RMT union announced that 20,000 workers would stage three days of walkouts.
The cost of a room at Premier Inn’s hotels in London rose sharply over the last three months, with tourists visiting for the coronation of King Charles and strong demand for budget stays in the capital boosting the chain.
A legal challenge against the government’s decision to build the Sizewell C nuclear power plant has been rejected.
The UK’s largest dairy cooperative has said there could be further increases in the price of milk and other dairy products if the government does not urgently tackle labour shortages in farming.
Sky has launched a Smart camera for its streaming television to allow customers to watch live and on-demand TV remotely with friends, place video calls via Zoom, track workouts and play motion-controlled games.
Analysis: Bank of England faces flak as economic history fails to repeat itself
Today’s latest Bank of England rate hike is an admission that 12 rises over more than 18 months have not been enough to tackle the problem, my colleague Phillip Inman writes.
Or, as the minutes said, the impact of shocks from Covid and the energy price crisis “were likely to take longer to unwind than they had done to emerge”, adding that the risks of inflation remaining high “were skewed to the upside”.
A 13th rise, and a big one at that, was needed to calm spending in the economy and reduce an inflation rate that remained stubbornly high at 8.7% in May, more than four times the 2% set by parliament as the central bank’s target. That was the view of seven MPC members. Two others said the Bank had caused enough pain and voted for a pause, to keep interest rates at 4.5%.
Will rates go higher? There were no clear signals. In the minutes of its latest meeting, buried at point 47, the monetary policy committee (MPC) said only: “If there was evidence of persistent pressures, then further tightening in monetary policy would be required.”
The financial markets expect the Bank will continue raising, to as high as 6% before the job is done and inflation slayed. here.
What today’s UK interest rate rise means for you
Thursday’s move is yet more bad news for the 1.4 million people on a variable-rate residential mortgage.
Roughly half are either on a base-rate tracker or discounted-rate deal, with the remaining 50% or so on their lender’s standard variable rate (SVR).
A household with a tracker mortgage currently at 5.5% will see their pay rate rise to 6%. These deals directly follow the base rate. This means their monthly payments will rise by £43 a month, assuming they have a £150,000 repayment mortgage with 20 years remaining. Their monthly payments rise from £1,032 to £1,075.
Those looking to remortgage face financial pain this year, but savers could benefit…. if banks pass higher interest rates on to them….
J.P.Morgan, Deutsche Bank and Goldman Sachs have all raised their forecast for the peak in UK interest rates to 5.75%, after the half a percentage point hike announced today.
Goldman Sachs expects a second 50 bps hike in August and a final quarter point hike in September.
J.P.Morgan, though, predicts a smaller 25bps (quarter-point) rise in August, followed by two more at future meetings.
JPMorgan now expects two additional 25 bps rate hikes by the BOE beyond August, taking terminal rate forecast to 5.75% in November vs 5% previously. @reuters #jpm #BOE #rates #UK
— Global Markets Forum (@ReutersGMF) June 22, 2023
JPM economist Allan Monks said.
“This new policy rate level in our forecast recognizes that there is a dynamic between wages and that needs to be stopped, and assumes the BoE will need to hike further in order to trigger a significant weakening in the labour market.”
Today’s interest rate hike will hurt borrowers, and add to the strains on those who need to remortgage this year.
But still, analysts at Morgan Stanley say it’s hard to argue with the Bank of England’s reasoning that “the scale of the recent upside surprises. suggested a 0.5 percentage point increase in interest rates was required at this particular meeting.”
However, they add that the rest of the minutes of this month’s meeting are “slightly puzzling”.
For one, aggressive hikes are probably most warranted when there is much more ground left to cover, in terms of tightening – think the Fed or the ECB early in their hiking cycle last year.
The MPC’s guidance is unchanged (“if there were to be evidence of more persistent pressures, then further tightening. would be required”), so it is de facto not even signalling that more hikes are the default stance.
On the other hand, the minutes make no effort to lean against the market pricing either. The visibility on the end point of this cycle clearly remains very low.
Guardian Newsroom: Can the UK avoid a recession?
Next month, a panel of Guardian journalists and experts will discuss the desperate state of the UK economy at a livestreamed event.
They will consider the UK’s inflation crisis, and the consequences of today’s interest rate hike for those facing financial insecurity.
Guardian Newsroom: Can the UK avoid a recession?
Join Larry Elliott, Heather Stewart and Ann Pettifor in this livestreamed event on the desperate state of the UK economy. On Thursday 20th July, 8pm.
The Bank of England has “bared its teeth” today, with its half-point rate hike, says Capital Economics.
However, they also believe it “needs to bite harder”, through further increases in borrowing costs this year.
Ruth Gregory, Capital Economics’s deputy chief UK economist, says:
The 50 basis point (bps) interest rate rise by the Bank of England today, from 4.50% to a near 15-year high of 5.00%, is unlikely to be the last hike given the UK’s higher and longer lasting inflation problem.
We think the inflation battle is not yet won and that the Bank will raise rates at least once more, in August to 5.25%, and keep rates at their peak until the second half of next year.
Heightened worries around the persistence of inflation forced the Bank of England to hike interest rate by half a percentage point today, says Deutsche Bank’s chief UK econmist Sanjay Raja.
Raja, who had expected a smaller, quarter-point rise, tells clients:
What did we learn today?
First, more ‘forceful’ hikes are now on the table. Second, despite the bigger rate hike today, the MPC stuck to its long-held forward guidance, giving itself more optionality heading into summer. Third, risk management considerations are clearly in play, given the persistence in inflation and wage dynamics. And fourth, financial stability risks may not be as pertinent as we assumed.
Where does this leave us?
We now see Bank Rate peaking at 5.75%, with three quarter point hikes in August, September, and November likely. Why not another 50bps hike? We see more downside risks to services inflation in the next print, relative to the Bank’s forecast for broadly unchanged services momentum.
Risks to our terminal rate call are tilted to the upside, particularly with the MPC chasing spot inflation and wage data, which may take longer to cool. And given longer and more variable lags in monetary policy transmission, we see the Bank of England potentially having to deliver more – not less – tightening to get inflation back under control. A peak terminal rate of near 6% no longer looks unattainable. But risks of a 2024 recession are very much on the rise. We maintain our call for the first rate cut to come in Q2-24, but now see risks skewed to swifter, more front-loaded, easing cycle.
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