If the phrase “self-fulfilling expectations” is anything to go by, taming inflation will continue to be tough. Businesses are doubtful of the central bank’s messaging on projected inflation. They expect it, and wage growth, to remain elevated. Consumers are growing cautious too. Many households are prioritising debt repayments in the face of high rates. Elsewhere, US job market is still strong but easing, while China’s economic recovery is losing steam.
All those thinking that May saw the end of interest rate hikes, think again. With the economy performing better than anticipated, but core and services price inflation remaining stubborn, many now think the Bank of England will be pressed to advance monetary tightening a tad bit more. An economy that has so far remained fairly resilient to higher rates may yet face a sterner test.
We are close to a turning point in monetary policy, but the full weight of rate rises to date have yet to be felt. And it might get worse for households in the near future. Firms have started cutting bonuses. And mortgage payments are going to shoot up. Any good news? The Bank of England is expecting the headline rate of inflation to show the first large drop this week, meaning prices would still be on the up, just not as rapidly as they have over the past year. Locally, another election is over. Back to porridge for the politicians. But back to Stormont?
Whether the Bank of England’s monetary tightening cycle has ended is yet unclear. Sure, the Bank has more upbeat views about the UK’s economic future. But there are still some unknowns. The full impact of high interest rates is yet to be felt. Firms haven’t paused hiring but are making cautious changes in types of staff hired. And while there is still some momentum left in growth, how long would it last?
Ahead of the Bank of England’s crucial interest rate decision this week, several surveys point to sustained inflationary pressures. Not surprisingly many believe the BoE will be hot on the heels of the Federal Reserve and ECB, raising Bank Rate again, but perhaps for the last time.
Easing of business concerns and continued (although softer) consumer spending growth signal better-than-expected economic performance in the second quarter. But in the medium run, higher debt repayment burden for the government amid elevated rates could limit fiscal space, barring election-related pump priming. That’s bad news for productivity, a long-running painpoint for the UK economy. Globally too, the growth momentum is slowing.
The heat is yet to come out of the UK economy. Business activity is rebounding steadily, the labour market is still very tight with sticky wages, and the drop in the pace of inflation remains slow. This presents a strong case for the Bank of England to raise rates again in May. But there are reasons for caution, too, including housing.
The UK economy seems to have exceeded expectations in the first quarter. Although GDP was flat in February, business and job surveys suggest March saw material improvements. Sure, headwinds do exist—stubborn core inflation, slowing wage growth, and tighter credit conditions globally. But this is the most optimistic the economic outlook has been in recent months. Does that mean we can wave goodbye to recession fears? Not quite yet. But don’t be surprised if we don’t end up seeing it this year.
Last week we heard conflicting opinions from the Bank of England on the outlook for inflation and interest rates. And the latest data releases provide little clarity to the conundrum. On the one hand, the economic gains that enabled the MPC to hike rates in March seem to be slowing, as seen in business surveys and consumer spending. On the other, inflation is still the main concern for firms.
The latest quarter seems to have gone by without signs of a downturn in spending or a recession. The drop in energy prices has certainly helped. And where it didn’t, savings were the saviour. But it is too early to celebrate. High inflation is still a major concern for businesses and consumers, weighing on demand. And on the other side of the cost-of-living squeeze lies the long-standing problems of low investment and weak productivity.
