The UK’s central bank has some tough months ahead, with pressure mounting for it to pause on rate hikes.
- A growing chorus of experts has raised concerns about the potential damage from continued rate rises.
- The full effect of rate rises has yet to be felt in the real economy
- There are concerns that further rate rises will tip the UK into financial distress
Mervyn King, the former governor of the Bank of England, said this week that the Monetary Policy Committee is risking recession by continuing to raise rates in the face of weakening prices. He is part of a growing chorus of experts raising concerns about the potential damage from continued rate rises.
These comments are coming from across the political spectrum. George Dibb of the centre-left Institute for Public Policy Research think-tank said: “The Bank has gone far enough with rate rises – in fact, we have probably gone past that point already… Further rate rises will further harm investment.” Right-leaning commentators such as Liam Halligan have expressed similar concerns that rate rises will constrain business growth.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Sometimes doing nothing is the hardest approach, but there is increasing evidence that’s the path the Bank should now be following. Based on their own projections, inflation will fall to 1.5% in three years’ time if the Bank hikes rates to 6% and then trims them back to 4.5%. At the same time its forecasts say CPI will fall to 1.4% if interest rates just stay where they are. This supports a pause in rate hikes, especially because the cost-of-living crisis engulfing consumers is currently being exacerbated by high interest rates.”
Most commentators agree that the full effect of higher rates has not yet been felt in the real economy, because the impact typically comes with a 12 to 18 month lag. Khalaf says: “A hiatus in rate activity would also give the bank more time to assess the impact of its past actions.”
Yet most still expect the Bank of England to raise rates to 5.75% from their current level of 5.25%. For King, this risks damaging the UK economy at a time when it is already vulnerable. Bank of England projections show almost no growth for the next two years, investment levels – a key indicator of economic health – are already at rock bottom.
Although market expectations are for more rate rises, the Bank of England governor Andrew Bailey, has been more circumspect. In the recent meeting, he said: “depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain.” Either way, the Bank of England has a precarious few months ahead and could be judged harshly whatever decision it makes. It’s a bad time to be a central banker.
