UK Interest Rates ‘Finely Balanced’ as BOE Inflation Fight Bites

Bank of England Chief Economist Huw Pill said interest-rate decisions are becoming “finely balanced,” hours after new growth figures highlighted the toll taken by the battle against inflation.

(Bloomberg) — Bank of England Chief Economist Huw Pill said interest-rate decisions are becoming “finely balanced,” hours after new growth figures highlighted the toll taken by the battle against inflation. 

The BOE kept rates unchanged at 5.25% last month amid signs that inflation is coming under control. However, policymakers split over the decision, and investors remain undecided over whether the fastest tightening cycle since the 1980s has now come to an end.

“Whether we’ve done enough or whether we have more to do, I think is becoming a more finely balanced issue,” Pill said at the Marrakesh Economic Festival in Morocco. “But we will do what we need to do in order to have inflation at 2% on a lasting basis.”

The impact of high borrowing costs on businesses and consumers was laid bare in official data on Thursday showing the UK economy registered only a modest rebound in August following a strike-afflicted July. 

The 0.2% expansion was driven by services such as education that had been hit by industrial action. Manufacturers and building firms both shrank, as did consumer-facing services. It left many questioning whether the economy can avoid a contraction in the third quarter.

Some said a recession may already be under way, deepening Prime Minister Rishi Sunak’s political challenge ahead of an election expected to be held next year. 

What Bloomberg Economics Says…

“Our baseline view has been for a while that the weight of interest rates would tip the economy into a recession at the back end of this year. The latest data however shows the downturn might have already started.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

The outlook for rates may become clearer next week, with official figures on inflation and the labor market due to be released. Officials will be closely watching for evidence of sticky inflation, including services prices, wage developments and the tightness of the jobs market, Pill said. Unemployment is rising and surveys suggest wage growth is cooling.  

In an interview with the BBC published Thursday, fellow BOE policymaker Swati Dhingra — who has repeatedly called for an end to rate increases — said the economy is already “flat-lining” with most of the monetary tightening carried out since the end of 2021 yet to take effect. The risk of the economy falling into recession were equally balanced, she said.

Activity in the housing market has also been hit by the string of 14 consecutive rate hikes. A BOE survey Thursday showed default rates on mortgages rising as more households struggle to keep up with more expensive payments. There was slightly better news from the Royal Institution of Chartered Surveyors, which said new buyer inquiries picked up in September as home-loan cost showed signs of stabilizing. 

Money markets see the BOE keeping rates unchanged again in November and put the chances of another quarter-point hike before the tightening cycle ends at little more than 50%. Rates are nevertheless expected to stay elevated for a extended period, a path Pill appeared to endorse as he said inflation remains “too high.”

“We are not done, it is premature in my view to talk about the unwinding. We are still in a phase of ensuring inflation goes back to 2% and we should not be deflected from that,” he said.

Extensive revisions announced by the Office for National Statistics last month mean that the economy is around 2% larger than previously thought, and no longer at the bottom of the G-7 growth league since before the pandemic. The laggards are now Germany and France, a development Sunak’s government was quick to highlight as it battles to stay in power. 

However, the International Monetary Fund thinks Britain will place last for growth next year, though its forecasts do not incorporate the latest revisions. 

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