Last week’s upbeat revisions to the UK’s economic performance in the first half of the year, whilst encouraging, brings little joy, as the impact of high interest rates on the economy continues to build. With the cost of credit rising, this is the best time for many households to rebuild their depleted savings. Mix in some election uncertainty and businesses too will likely postpone their investment decisions. All combined, it’ll keep growth subdued.
Policy tightening across the globe is nearing its end. The Bank of England (BoE) and Federal Reserve (Fed) paused their respective rates hiking cycles last week, while the ECB signalled a final hike the week prior. At home, the vote was rather close, 5-4, and the MPC’s guidance suggested they are maintaining optionality about future hikes. Globally, the prolonged monetary tightening phase has constrained the growth outlook for this year and next.
So far the Bank of England’s rate hiking cycle had been made somewhat easy by the UK’s strong economic performance. But MPC members perhaps shifted in their chairs as last week’s data releases told a story of fading economic momentum and a cooling labour market. However, wage pressures remain intact, and inflation expectations have edged up. Oil’s been on an upward march of late, feeding higher prices at the pump: petrol’s at its highest level since last December. Lots to ponder ahead of Thursday’s rate decision.
While the eye of the cost-of-living storm may have passed, the impact is continuing to be felt. Household spending appetite is moderating. Businesses are also turning cautious amid rising rates, holding back on major investment and staffing decisions. With the direction of policy still uncertain, this week’s GDP and labour market releases will be crucial indicators of the next move.
The story of the UK’s economic resilience of 2023 is being put to the test – the impact of all those hikes in interest rates may just be beginning to more obviously weigh on growth, according to the latest PMI suveys. The situation is little better elsewhere, with the eurozone in particular exhibiting signs of weakening economic momentum.
The MPC delivered the expected rate hike last week, even if the committee itself was far from unanimous. There’s more agreement on the outlook however — muted growth, gradually increasing labour market slack, and continued disinflation are still the prediction.
The battle against high inflation is not over yet. Granted, business surveys show prices to be a waning area of concern, as firms now fear muted demand. That seems to be corroborated by a dip in consumer spending. But wages are still on the rise. So barring a minority of dovish voices, the Bank of England’s resolve to bring inflation back to target remains firm. More hikes are coming.
Bank of England policymakers turned more hawkish last week, raising rates by an even greater amount and refusing to offer any pushback to markets that are pricing further rate hikes in coming months. Mortgagers are at the receiving end of higher interest rates. Across the wider economy tremors are already being felt, in areas like construction and business activity. Elsewhere, the story is no different, with a slowdown materialising in the US and the Eurozone.
With major central banks (Fed, ECB, People’s Bank of China) adopting divergent stances on monetary policy last week, all eyes are on the Bank of England this week. Rates expectations have steepened as the economy continues to fare well, and high wage growth points to sticky inflation. Another quarter-point hike seems like a done deal.
As temperatures around the UK begin to hot up, there is added cause for optimism on the horizon. Energy prices, though still a pressing issue, are receding. Globally, there are positive signs of a bounce-back despite enduring inflationary undertones. Sticky core inflation presents a tricky balancing act between sustaining the recovery, controlling price pressures, and maintaining financial stability. Ahead lies a busy week for central banks, with the Fed and European Central Bank in action. The key question for now is: are we done with the tightening campaign?
