On the go: The Bank of England has raised interest rates by 0.5 percentage points.
The central bank’s Monetary Policy Committee voted six to three to increase the base rate of interest to 3.5 per cent. Two members voted to keep the rate unchanged at 3 per cent, and one member wanted to raise the rate to 3.75 per cent.
The central bank said the MPC expects UK gross domestic product to decline by 0.1 per cent in the last quarter of this year, as household consumption “remains weak”, the labour market remains tight, and most housing market indicators have continued to soften.
It added that the measures announced in the Autumn Statement, as well as the energy price guarantee, will increase GDP by 0.4 per cent next year, but will then reduce it by 0.5 per cent in three years’ time, reflecting the fiscal tightening planned for 2025 onwards.
The annual rate of inflation slowed in November, to 10.7 per cent; however, it is still at a 30-year high.
The BoE has a mandate to target a 2 per cent rate of inflation, which has been missed since May 2021, and last month governor Andrew Bailey told MPs that economic shocks were the reason for this.
High energy prices have been the cause of a lot of the overall rise in inflation in the UK, as a result of the uncertainty over energy supply after Russia’s invasion of Ukraine.
Concerns are rising over the impact of higher interest rates on the UK’s economy, which was forecast to be in recession in 2023.
Alongside the Autumn Statement in November, the Office for Budget Responsibility released an economic growth forecast, which said the UK’s economy was due to decline by 1.4 per cent in 2023, steeper than the growth of 1.8 per cent predicted a few months earlier.
LCP partner Steve Hodder noted that “while short-term rates continue to go up, the gilt market’s view of longer-term rates has continued to come down following the very high levels we saw after the ‘mini’ Budget”.
“This seems to reflect a growing confidence that the BoE and the government will indeed be able to get on top of inflation, and perhaps also a view that with the UK heading for recession rates will need to be cut to support the economy,” he said.
“It is these long-term rates that matter most for pension scheme funding, investment strategies and transfer values.”
This article first appeared on FTAdviser.com
