Bank of England accused of over-reacting after raising interest rates to 5.25% – business live | Business

Afternoon summary

Andrew Bailey has told CNBC that the Bank of England is cautious in its battle to tame stubbornly high inflation, as UK data continues to offer “unwelcome surprises.”

Here’s a video clip from this lunchtime’s press conference at the Bank of England, following its latest increase in interest rates:

BoE governor Andrew Bailey has defended the Bank against criticism that it has raised interest rates too high.

He’s been interviewed by ITV News, who ask if there is a risk that the Bank goes too far, as some former senior staff from the BoE fear.

Bailey replies that there are areas of the economy where the Bank has not yet seen evidence that inflation is reliably on the way down – such as in the services sector.

Bailey says:

I hope and believe we’ll get there pretty soon, because I do think we’re going to see quite a marked fall, but we haven’t got there yet.

Q: Andy Haldane, the Bank’s former chief economist, says raising rates runs the risk of propelling a brick towards the financially vulnerable – is that a risk you’re prepared to take?

Bailey says the Bank is “very cognisant” of the fact that some people are very seriously affected by rate increases.

But, he adds, UK banks are in a strong position to support their customers.

Bailey also takes a pop at some of the commentators on the sidelines – only a month or two ago, he says, some people were saying rates would have to hit 6% to cool inflation.

BNP Paribas’s Markets 360 team have cut their forecast for the peak in UK interest rates to 5.5%, from 5.75% previously.

But they also predict that rates may fall less slowly than previously expected:

The shift in emphasis from the level of restrictive rates to their duration suggests that the Bank of England’s Monetary Policy Committee is guiding towards the end of the tightening cycle.

· As a result, we lower our terminal rate forecast from 5.75% to 5.50%, which we expect to be reached at the September meeting.

· However, as the BoE has said it is taking a “different path” to achieve the same end result, implying that the risk is for later and/or shallower cuts than we currently expect.

Ed Conway of Sky News points out that the UK’s growth outlook is miserable.

That’s unlike the US where the economy has, excitingly, returned to its trend levels before the financial crisis 15 years ago:

Forecasts continue to pour in, with Rabobank predicting the BoE will raise interest rates one more time, in September, before pausing its hiking cycle.

RBC Capital Markets say there was “little in the way of explicit guidance” today from the Bank of England on the near-term path of Bank Rate.

But they suspect that the BoE is close to ending its cycle of interest rate rises which began back in December 2021 (when it raised Bank rate from 0.1% to 0.25%).

RBC Capital Markets say:

There was though a significant insertion into the policy summary and minutes of the sentence “Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive”.

To our minds, that was a signal from the Committee that, even though they continue to be data led, they think they are close to the end of the current hiking cycle.

In the press conference Deputy Governor Ben Broadbent avoided giving a definitive level for where neutral or r* may be but did say that the MPC “think we are seeing evidence” that interest rates are “above that neutral level because we are seeing an impact on demand”.

HSBC UK and first direct have also announced plans to raise some savings rates from 10 August.

Among the increases, first direct’s Savings Account and HSBC UK’s Flexible Saver rates will both increase by 0.25 percentage points, from 1.75% to 2.00%. Both deals are instant access accounts.

NatWest Markets has cut its forecast for the peak in Bank of England interest rates to 5.5%, down from 6%, after the BoE’s announcement today.

NatWest Markets’ chief UK economist, Ross Walker, wrote in a note to clients:

We are revising our Bank Rate forecast and now look for just one more 25bp hike to 5.5% in September.

The apparent rowing-back in the MPC’s policy-tightening guidance leaves us comfortable maintaining our negative bias on sterling.

The Bank of England may not start to cut interest rates until the third quarter of next year, predicts Andrew Goodwin, UK chief economist at Oxford Economics:

We think the projection for pay growth looks a little too low. Our proprietary sentiment data developed in collaboration with Penta suggests the momentum behind pay growth is likely to remain stronger. Also, as we argued in a recent note, there’s good reason to think that second round effects will prove persistent. Inflation expectations may not fully decline in line with headline inflation because of the scarring effects on inflation psychology from recent high inflation rates. Moreover, even if inflation expectations fall, pay growth may stay above a target-consistent pace as workers seek to recoup lost real wages. Core inflation may also be slow to fall if firms seek to rebuild margins.

We think the scope for further upside surprises for pay growth means that one final 25bps hike in September is likely, taking Bank Rate to a peak of 5.5%. Financial markets temporarily repriced after the announcement, cutting their expectations for peak Bank Rate by around 15bps.

But the press conference encouraged them to reconsider and, at time of writing, markets fully price in two more 25bps hikes, as they had prior to the meeting.

The MPC also cut its forecast for GDP growth next year to 0.5%, bringing it close to our own projection. It also lowered its forecast for GDP growth in 2025 by 0.5ppts to just 0.25%. In our view, this looks exceptionally weak, but it reinforces the idea that the BoE views virtually any growth as being inflationary. Against this backdrop, we retain our call that the first UK rate cut will come in Q3 2024, several months later than the Fed and ECB.

Today’s increase in interest rates is likely to spark concerns for businesses across the UK who have already experienced a challenging few years, warn Dr Arun Singh, global chief economist at Dun & Bradstreet.

Our recent research shows that businesses are still dealing with weak consumer demand. This economic uncertainty calls for more resilience, and it’s important for businesses to have a detailed view of their ecosystem to help navigate the current environment.

Having access to data that provides more visibility of supply chains, financial pipeline and customer needs is critical for businesses to predict, prepare and secure their future success.

BoE governor Andrew Bailey was insistent at today’s press conference that the Bank of England was data-dependent – further interest rate moves will depend on the path of the economy.

Melanie Baker, senior economist at Royal London Asset Management, explains:

With domestically driven inflation pressure still looking strong, I continue to think we aren’t quite at peak rates in the UK and pencil in another 25bp rate rise this year.

Much, of course, will depend on how the data evolves – as it will for all the major central banks.

July’s inflation report will be a crucial factor, especially now that Bailey has predicted the CPI index will fall to around 7%, from 7.9% in June:

Investec, the bank and wealth manager, says today’s UK interest rate rise is the latest phase of the sharpest monetary policy tightening cycle since UK inflation targeting began (in 1992, I believe).

Investec economist Philip Shaw argues that rates are approaching their peak (or ‘terminal rate’, in City jargon):

The level of the Bank rate is now at a 15½ year high and, as the BoE points out, the stance of policy is undoubtedly restrictive.

Unless labour market pressures turn out to be considerably more durable than we believe them to be, further spare capacity should be opened up in due course and we should be close to the terminal level of the Bank rate.

We stand by our view that the peak in Bank rate will occur at 5.75%, although we have now shifted the timing of this out to Q4 from Q3.

Some financial firms have announced they are increasing their savings rates following today’s Bank of England rate rise.

Nationwide building society says current account customers on its Flex Instant Saver 2 account will see the rate increase by 0.25% to 3.25%, matching the increase in Bank rate.

Its Triple Access Online Saver will see an increase of 0.75%, with it now paying 4.25%.

Marcus by Goldman Sachs also notified savers of immediate rate increases.

It told customers the underlying rates on its Online Savings Account, Cash Isa and Maturity Saver have increased from 3.64% to 3.94%. Holders of an Online Savings Account or Cash Isa with a bonus rate will receive a new total rate of 4.30%.

Chancellor Jeremy Hunt has welcomed the Bank of England’s forecast that inflation will fall.

In an interview with Sky News, Hunt says any rise in interest rates is a worry for families with mortgages, and for businesses with loans.

But, he adds, underneath today’s decision is a forecast that inflation will be 2.8% this time next year, and the economy will avoid recession.

Hunt also offers his analysis of the Bank of England’s comments, saying:

What the Bank of England governor is saying is that we have a plan that is bringing down inflation, solidly, robustly and consistently.

Hunt says the government’s plan is working, but it must stick to that plan, and not “veer around like a shopping trolley” [which, incidentally, is how Dominic Cummings described Boris Johnson’s style of government].

This won’t please mortgage borrowers: Nicolas Sopel, head of macro research & chief strategist at Quintet Private Bank, believes UK interest rates will rise to 6%.

Sopel explains:

The BoE noted some progress on the inflation front, “falling but still too high”. However, the Bank’s projections, which were revised slightly lower for 2023 and 2024, still revealed that inflation will remain above the 2 per cent target and only return to that target by the second quarter of 2025.

This underscores the MPC’s view that the Bank Rate must remain restrictive for longer.

While economic data has turned more mixed and despite slowing growth, we think that the Bank of England will continue to raise the Bank Rate in 2023, bringing it to 6 per cent. This is because underlying price pressures remain elevated, driven by strong wage growth.

The BoE will likely be the last central bank in developed markets to pause its tightening cycle.