The noise
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The Bank of England (BoE) increased interest rates from 4.5% to 5% on Thursday, its highest level in 15 years and a larger increase than many economists expected. BoE Governor Andrew Bailey admits that “we know this is hard”, but “if we don’t raise rates now, it could be worse later”. Despite this, UK consumer confidence reached a 17-month high, indicating that households so far appear to be withstanding the worst cost-of-living crisis in generations.
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UK CPI rose by 8.7% in the 12 months to May, unchanged from April and cementing the UK’s place as the major advanced economy with the fastest rate of inflation. Economists had expected inflation to fall to 8.4% for May, and perhaps more worryingly, core CPI (excluding energy, food, alcohol & tobacco) reached 7.1%. This is its highest rate since March 1992, and clearly suggests more needs to be done to tame inflation.
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The World Bank revealed plans to insert clauses into new debt contracts that will allow developing countries to pause debt repayments if severely impacted by the effects of the climate crisis. This was agreed at a summit in Paris, where the UK has also stated that it would be applying similar agreements and arrangements to loans it provides to countries in the Caribbean and Africa. These clauses promised by the World Bank and UK however will only be inserted into new loans, despite hopes that they would apply to existing loans.
The numbers
The nuance
The Bank of England hiked rates up 50bps to 5% in a 7-2 vote. The decision to increase rates did not come as a big surprise considering the data releases we’ve had through June, but many market participants were expecting the increase to be limited to 25 bps. This latest decision has shone a light on the lack of clarity and forward guidance the Bank of England has provided of late. In JP Morgan’s view, the BoE’s decision to say less rather than more indicates that more uncertainty is likely to be attached to future decisions.
So far you could say the 13 consecutive rate hikes we’ve experienced have done little to calm inflation, although the speed at which the hiking has taken place has perhaps not allowed them to take full effect. A clear effect of this latest hike is that it drives the cost of mortgages up further, reducing income available to homeowners to spend elsewhere. Savings will be made even more attractive, which will hopefully reduce spending and reel inflation back in. With a peak interest rate of 6% already priced in by market participants, it shows that despite this big step in the right direction to cool inflation, there is still a long way to go.
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