BANK OF ENGLAND SAYS INTEREST RATE RISE LIKELY ‘OVER COMING MONTHS’
** This article was first published on 18 Nov 2021. Note that on 16 Dec 2021 it was announced that interest rates would rise by 0.25% from 0.1% for the first time in three years. **
Lai Wah Co, Bank of England Deputy Agent for Greater London, writes…
“The UK economy is continuing to recover from the huge fall in economic activity caused by the pandemic. As restrictions have been lifted, people have been spending more at shops in Greater London and other businesses across the rest of the UK. And businesses have generally grown more confident about making investment-spending decisions, many of which were postponed soon after the pandemic hit.
In its latest quarterly Report, the Bank of England’s Monetary Policy Committee (MPC) said that it expected GDP—a measure of how much economic activity, or spending, is going on—in the UK to get back to its pre-pandemic level early next year. That’s not to say that all businesses and all households are now doing well. Some are still struggling to fully recover, especially in areas where restrictions are still in place and demand remains weak, such as foreign travel, some indoor hospitality and some of the creative arts sector.
In many areas of the world economy, supply bottlenecks have developed—for example, there’s a severe shortage of the semi-conductors used in car manufacturing—leaving businesses short of the things they need. And, as we all know, businesses and households are facing much higher gas, oil, and electricity prices, too. Because of the combination of higher demand, supply bottlenecks and the rises in energy prices, inflation has picked up.
In the UK, the prices of the basket of things people typically buy increased by around 3% between September last year and September this year. The MPC expects consumer price inflation to rise further above our 2% target and reach a peak at around 5% in spring next year. But the MPC also thinks that these high rates of inflation will be temporary. That’s because we don’t believe that demand around the world will continue growing as quickly as it has been during the initial recovery from the pandemic.
So, many of the bottlenecks and shortages that are making things difficult for businesses should ease. But what will happen to energy prices is very uncertain—for instance, they might fall back towards their pre-pandemic levels more quickly than we assume in our forecast. In fact, gas prices have already fallen since the latest forecast was finalised.
Another area of great uncertainty is the jobs market. With the help of the furlough scheme, which closed at the end of September, the increase in unemployment since the pandemic began has been relatively small. Indeed, many of the businesses that the Bank’s agents speak to have been finding it very difficult to get enough staff. My contacts have been telling me that lawyers, IT workers, warehouse and restaurant staff are particularly hard to find. That said, more people were still on furlough when the scheme ended than we’d expected, and unemployment is still higher than it was just before the pandemic. The closure of the furlough scheme isn’t expected to cause unemployment to rise much, but we don’t yet have the official data to be sure about that, making it very difficult to be certain how strong the jobs market currently is.
Given the high level of uncertainty, a majority of the MPC voted to keep monetary policy unchanged in November. However, the MPC also said that a rise in the base rate, which we call Bank Rate, was likely over the coming months. To keep interest rates on mortgages and business loans low, Bank Rate was cut to a record low of 0.1% last year and our quantitative easing programme was expanded. Lower interest rates reduced the cost of borrowing for households and businesses, leaving them with more money to spend.
These policies have provided important support for the UK economy. Now that the recovery is underway and inflation is above target, the economy is likely to need a bit less support, to ensure that inflation returns to the 2% target. With the help of our contacts here in Greater London, we will continue to ensure that the MPC has all the information needed to make policy decisions in the best interests of the economy and for the benefit of the people of the UK.”