The central bank's Monetary Policy Committee (MPC) has announced a 0.25% point increase to the country's base rate. For the past year, the Bank of England has hiked interest rates multiple times in an attempt to rein in inflation with this being the 11th increase in a row.
This announcement comes following the revelation that Consumer Price Index (CPI) inflation rate for the 12 months to February 2023 rose to 10.4%. Financial analysts were surprised by the Office for National Statistics (ONS) figures, having initially forecast a drop in inflation for the period. As a result, experts shared that another hike to the base rate of at least 0.25% points was "locked in" to contend with this increase in CPI inflation.
Workers in Britain have been warned their retirement plans may be held hostage by high inflation rates and the cost of living crisis. The consumer price index jumped to 10.4% in the 12 months through February from 10.1% the previous month, the Office for National Statistics said on Wednesday.
Joe Nellis, a professor of Global Economy at Cranfield School of Management, warned of the potential economic catastrophe that awaits following thursdays announcement. Prof. Nellis said, "the Bank of England's decision to increase interest rates to 4.25% could push the economy into a full-blown recession. A growth recession was inevitable prior to the rise, but the vote by the MPC will only delay any prospects for an economic recovery. Why has the Monetary Policy Committee voted to make matters worse? Households are already facing the biggest fall in their living standards for many decades, and the banking sector is under strain. Further interest rate rises will do more harm than good at this stage. The Bank of England must pause and wait to see if inflation plummets in the months ahead."
LONDON (Reuters) - The Bank of England (BoE) raised interest rates for the 11th time in a row but said a surprise resurgence in inflation would probably fade fast, prompting speculation about whether it had now ended its run of hikes. Sounding more upbeat about the outlook for Britain's sluggish economy but noting the risks posed by turmoil among global banks, the BoE's nine rate-setters voted 7-2 in favour of a 25 basis-point increase in Bank Rate to 4.25%, as expected by economists polled by Reuters.
This rate rise extends a run of increases that began in December 2021, although it was the Monetary Policy Committee's (MPC) smallest increase since June.
Investors priced in one more quarter-point rate hike at its next meeting on May 11 before the BoE pauses, pushing up sterling moderately against the dollar. But many economists said the central bank might already have come to the end of its tightening cycle. BoE Governor Andrew Bailey kept his cards close to his chest when asked about the latest rate rise. "We don't know whether it's going to be the peak, what I can tell you is that we've seen signs of inflation really peaking now. But of course it's far too high.... We need to see it starting to come down progressively and get back to target."
The BoE - which is trying to reconcile the weak economic outlook and anxieties about global banks with stubbornly high inflation - repeated a message it gave last month which suggested less urgency around raising rates. "The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation, if there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required, " the BoE said.
Bailey and his colleagues last month dropped language saying that they were ready to act forcefully on rates if needed. Gurpreet Gill, a strategist at Goldman Sachs Asset Management, said, "strong growth in domestically generated inflation - typically higher pay deals - was behind the hike. But we continue to see a case for a pause after today given the expected drag on growth from past policy tightening and recent financial market volatility."
In Thursday's statement, the BoE said price growth was on course to fall more sharply than it previously thought in the April-June period, despite data on Wednesday showing a surprise jump in inflation to 10.4% in February. Some of that increase was due to often volatile clothing prices which could proves less persistent, it said.
Ross Walker, head of global economics at NatWest Markets, said "the MPC does not seem remotely fazed" by Wednesday's inflation surprise and was confident wage pressures would ease. "The overall tone of the March minutes seems mildly dovish," he said.
The BoE said inflation in the second quarter would be lower than the BoE forecast last month, helped by the government's extension of state subsidies to lower households' utility bills and a fall in international energy prices. MPC members Swati Dhingra and Silvana Tenreyro again voted to keep rates on hold while Catherine Mann, who has been the panel's strongest advocate for bigger hikes, backed the 25 basis-point rise.
Bank worries
As recently as Tuesday - before the February inflation data - investors were split 50-50 on whether the BoE would leave Bank Rate unchanged after the rescue of Credit Suisse and the collapse of Silicon Valley Bank. The BoE noted "large and volatile moves" in global financial markets but said its Financial Policy Committee judged that Britain's banking system was resilient."The MPC will continue to monitor closely any effect on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook," it said.
The European Central Bank last week stuck to its plans and raised rates by 50 basis points despite the turmoil, a move repeated by the Swiss National Bank on Thursday. On Wednesday, the U.S. Federal Reserve raised its main interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases.
The BoE predicted measures included in Hunt's budget last week would increase the level of gross domestic product by about 0.3% over the coming years. It predicted GDP would grow slightly in the second quarter, having said in February it was on course to shrink by 0.4%. As well as the extended energy subsidies to households - which had originally been due to expire in April - the BoE now expects stronger employment growth than previously forecast. The BoE is worried about pay growth which, despite cooling a bit recently, is running far above its historical average and shortages of workers remain acute, all of which is inflationary.
However, it said it expected wages to rise slightly less than it had previously forecast, as inflation expectations fell.
Is this the end of UK interest rate rises or are there more to come?
Tasked with striking a balance between an unexpected increase in February’s inflation numbers and concerns about a new banking crisis, the Bank of England voted today for an 11th consecutive rate rise. The question now is whether they will opt for a 12th.
Markets are pricing in a further small hike to 4.5%. However, a glance at the forecasts for inflation show it declining rapidly this year, mostly in response to a dramatic fall in energy costs. While wholesale gas prices are expected to be double the pre-pandemic level next year, they will have fallen back from the five-fold increase in 2022.
Strong wages growth, which for more than a year has been the central bank’s main worry, began to wane last November and has been largely flat ever since.
By next spring the consumer prices index will be below the 2% target level. On this most forecasters agree. So why carry on cutting rates now when the job is done, if the only job is to bring inflation down to the target level?
This point persuaded monetary policy committee (MPC) member’s Silvana Tenreyro and Swati Dhingra to vote against a rate rise from 4%, just as they both objected to the increase from 3.5% in February.
The Bank’s remaining seven MPC members, including the governor Andrew Bailey, indicated that the strength of the economy underpinned their decision for a further base rate increase to 4.25%. According to this view, upwards pressure on inflation could come from the economy’s moderately improved resilience. For instance, it was eye-catching that a previous Bank forecast fall of 0.4% in the UK’s gross national product (GDP) during the second quarter of 2023 was torn up by the MPC in favour of an expectation that GDP will “increase slightly”.
Most of this extra buoyancy can be attributed to the chancellor’s extension of the energy price guarantee from April to July, which will protect household incomes and consumer spending during the summer.
Global GDP is stronger than previously expected after the reopening of China’s economy and the boost to businesses from cheaper oil and gas.
And then there is the fact that the Federal Reserve and the European Central Bank have recently increased interest rates. At 0.25%, this was the smallest increase since June 2022. The MPC minutes suggest another after this one is unlikely. There was a reference to the need for “persistent” inflationary pressures to be obvious before another increase is approved.
To some extent, a quarter point rise treads a middle way. It shows a commitment to bringing down inflation while not turning the screw too much more. That might seem palatable inside Threadneedle Street, but the MPC risks having already overtightened and that this latest rise just makes the situation, for households and businesses, that much worse.
The minutes don’t say it, but it would take quite a leap for the Bank to push through another rise.
Double whammy for landlords interest rate rises and section 24
Until the recent interest rate rises started to bite into cashflow, many larger portfolio landlords had taken the decision to pay the extra tax resulting from the Section 24 restrictions on finance cost relief as opposed to restructuring their business. It might be said that the level of pain they were enduring from Section 24 wasn’t enough, but for many more, IT IS NOW!
There comes a point for everyone when they have to admit to themselves “enough is enough”.
These landlords can no longer bury their heads in the sand. Either they exit the business partially or altogether or make other radical changes to the ownership structures of their property rental businesses. Either way, they desperately need some good quality tax advice.
If they sell their rental properties now they could be hit with a huge Capital Gains Tax bill. If they change their ownership structure without professional advice the financial consequences could be even more catastrophic. An age old saying is that “if you think professional advice is expensive, wait until you try using an amateur or advise yourself”.
Since the beginning of this year, the Bank of England has increased base rates from 0.1% to 4.25%. This equates to an annual loss of £41,500 of cashflow on every £1,000,000 landlords have borrowed. To make things worse, this additional expense can no longer be offset against rental income. Instead, an additional tax credit of just £8,300 (20% of the increased finance cost) is applied, based on the same example.
Some landlords will not have felt the pinch quite yet, because their mortgage interest rates will be fixed. However, when those fixed rates expire they will find themselves in a new World of pain.
At what point will YOU be saying “enough is enough”?