Should the BoE increase rates?
The Bank of England is widely expected to increase rates today by 0.5%. Free PR platform, Newspage, asked IFAs and mortgage brokers whether it's the right or the wrong decision. Their views are below.
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8 responses from the Newspage communityCopy all
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The BoE has to raise and should raise Bank Rate, it’s their only weapon.
What we can’t forget, though, is that it’s a problem entirely of their own making. Like the US Fed, they didn’t pay attention to inflation properly and are so far behind the curve that it was already out of control, meaning rate rises had to be more aggressive and more frequent. As the economy is a lagging indicator, it will inevitably lead to recession and I wouldn’t be surprised to see them cutting rates in late 2023.
What we can’t forget, though, is that it’s a problem entirely of their own making. Like the US Fed, they didn’t pay attention to inflation properly and are so far behind the curve that it was already out of control, meaning rate rises had to be more aggressive and more frequent. As the economy is a lagging indicator, it will inevitably lead to recession and I wouldn’t be surprised to see them cutting rates in late 2023.
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Rates should not be going up today but they will as everyone seems to be asleep at the wheel of UK Plc. Inflation is already decreasing and will continue to do so in 2023 and 2024 according to the Bank of England's own forecast. Rate increases are going to disproportionately affect the least well-off in society and do little to speed up the decline in inflation. People still have to consume a minimum level of goods and services just to survive.
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While I expect the base rate to rise by 0.5%, I do think that this is the wrong decision for today. Inflation has dropped based on the latest numbers, and whilst it's still way off target, we are in recession and what's needed is for the economy to be stimulated. This inflation is caused by factors way beyond our shores, and raising interest rates is going to do nothing apart from stifling growth. People are genuinely struggling, not spending money. If it were me, I'd be waiting until January, looking at the numbers from December and then making a decision in early February.
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The Bank of England has a mandate to keep inflation to 2% so feels it has no choice but to raise interest rates, but in reality this will make no difference in getting us back to target. By May, inflation will be very close to target once the shock effect of the war in Ukraine had on our energy bills is 12 months old. Domestic inflation will be negative by then as the economy will have crashed and stayed down. All the central bank is doing by increasing rates is making it more difficult for homeowners at a time when energy bills are already putting immense pressure on them. Increased energy bills and higher tax burdens are shrinking disposable incomes, doing the Bank's work anyway, so there is no need to go further. All the Bank is doing is putting itself into a corner meaning it will have to cut further and faster in the Spring.
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I don't buy into the argument that inflation was entirely due to supply chain shocks . There was also a huge increase in money supply during the pandemic, and once the economy re-opened, there was too much cash chasing too few goods. Raising interest rates was always necessary to protect Sterling against other currencies, particularly the Dollar. If we hadn't done so, the Pound would have plummeted against the greenback, probably below parity. This would have been hugely inflationary given oil and gas are priced in dollars on international markets. That said, if inflation has peaked, it's possible today's Bank of England base rate hike is the last we see for some time.
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The UK needs growth. Given that we have full employment, we can grow through upskilling our workforce, investing in efficiency-driving equipment and innovation. All three need investment. Rising interest rates stifle investment. However, inflation is a thief. At these levels, inflation has taken away the equivalent of more than one month's salary from people. It needs tackling. The books also need balancing. There is the dilemma: balancing the books and curbing inflation versus growth. Growth is likely to take a back seat for some time.
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Inflation fell in November to 10.7% from its 41-year high of 11.1% in October. While it may sound positive, it still means the price of goods and services is increasing at alarming levels, just at a slightly lower rate than the month before. This does little to ease the minds of those struggling with the cost-of-living crisis and is only accentuated by the fact wages have failed to keep up with the soaring cost of living. Many are suggesting we are past the peak of inflation, but this is unlikely to be the case. Unfortunately, the likelihood of this being the last hike is slim. We are expecting further increases up to 5%, until we reach a point at which the Bank of England has inflation firmly under control.
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The dovish tone of the BOE in November as well as the withdrawal of all almost fiscal loosening seems to suggest that the BOE rises are going to slow. The problem is we have 2 fights inflation and GDPR and until we can get inflation dropping we can't focus on GDPR. So if this base rate rises gets inflation falls quicker, then I am all for it, short term pain is long term gain or so we hope.