At the monetary policy committee meeting on December 15th, Bank of England policymakers decided to raise the interest rate by 50 basis points. The decision, which was supported by six MPC members, came as BoE officials forecasted a somewhat improved outlook for GDP and slightly lower inflation.
Divided BoE poses risk to rate outlook
One MPC member voted for a 75bps increase, while two MPC members wanted to leave the rate on hold. The choice raised the policy rate to 3.5%.
It was a rather indecisive meeting as the consensus usually leans toward unanimous decisions. However, since two members wanted rates to stay unchanged, the Pound plunged as chances are for smaller rate hikes in 2023.
You may also read: Focus on central banks: BoJ with major change in 2023
In both, absolute terms and in comparison to other forecasters, the Bank of England’s predictions remain gloomy. However, rather than being a predetermined level, the peak in interest rates will eventually be determined by the process of discovery. Everything depends primarily on how persistent wage pressures and inflation remain over the next six months.
Phoenix Asset Management considers the Bank of England to be a “reluctant hiker” as the economy decelerates. They anticipate that the MPC will have to raise interest rates to a bit above its preferred landing zone of 4.5% by next May due to ongoing inflation and the tight labor market.
Troubles with inflation in a recession
However, the odds are heavily in favor of inflation continuing to develop. If that’s the case, the main central banks won’t be able to lower interest rates for the entirety of next year, making the economic downturn that much more difficult.
The most recent BoE panel of CFOs revealed that businesses anticipate price increases of 5.7% over the next year and inflation of close to 4% in three years, which is double the BoE’s 2% target (the BoE’s consumer survey reveals expectations that are somewhat more firmly grounded, at around 3%).
Regarding the economic downturn, the consensus is for a 1.3% decline in the UK’s GDP in 2023, followed by a very gradual recovery in 2024. Given that salary increases fall short of inflation, the cost of living problem is anticipated to continue to have a negative impact on household disposable income in 2023.
Inflation should return to the Bank of England’s 2% objective as a result of the impending recession. Inflation is anticipated to stay close to the October estimate of 11.1% until April when base effects should cause the energy component to decrease sharply.
Another interesting topic: Crypto outlook for 2023: more pain to come or will Bitcoin recover?
There are a number of significant dangers to the 2023 forecast. Significant downside risks include the spread of economic sanctions and higher-than-anticipated energy costs as the conflict in Ukraine goes on, as well as a worsening of the public health situation owing to additional COVID strains.
Costs of products and energy that are higher than anticipated may dampen consumer spending and slow economic expansion. If supply and labor constraints persist for an extended length of time, businesses may be forced to permanently reduce their operational capacity or face salary inflation. A positive turn in trade negotiations might boost business and brighten prospects.
Comments
Post has no comment yet.