03/11/2022
Source: Graph from News.Sky.com; data from Bank of England
Today, the Bank of England rose its policy interest rates by 0.75 percentage point -a 3 per cent increase-, matching the US Federal Reserve’s increase earlier this week. Although the Bank of England has raised interest rates to their highest point since 2008 , the Bank of England surprisingly insisted that interest rates might not rise as high in the future as anticipated by financial markets: ” We can make no promises about future interest rates, but based on where we stand today, we think [rates] will have to go up by less than currently priced into financial markets. That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.” Andrew Bailey (BoE governor). Message from the Bank of England: I have posted below an extract of the message posted below by the Bank of England while rising interest rates. I think that the message is a clear and concise summary of the situation. The message describes some of the reasons for the inflation and recession in the UK – these causes are applicable to many other countries. “Inflation is too high. High energy, food and other bills are hitting people hard. In September, prices had risen by 10.1% compared to a year ago. That is well above our 2% target. Higher energy prices are one of the main reasons for this. Russia’s invasion of Ukraine has led to more large increases in the price of gas. Higher prices for the goods we buy from abroad have also played a big role. During the Covid pandemic people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad. There is also pressure on prices from developments in the United Kingdom. Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. Prices for services have risen markedly. Households have less to spend on other things. This has meant that the size of the UK economy has started to fall.” Bank of England Official Statement– 03/11/2022
What does the Bank of England predict in the long term? The Financial Times, as often, published a very interesting article (https://www.ft.com/content/457f5404-54c7-456e-b388-88e170d14b07) on the current and past positions of the Bank of England – if you have time, go read it, it is relatively short. If you can’t be bothered, I have included the key graphs below.
The first graph describes the BoE’s expectation across two interest rate scenarios. Looking at the last graph, one might be sceptical regarding the projections made by the Bank of England and he/she should be – predicting the interest rates in such unstable times is extremely complicated even for the brightest macroeconomists of the country.