Bank of England bucks rate-rise streak againby
After the Bank of England's announcement today interest rates remain at their highest point since 2008 as inflation remains stubbornly high at 6.7%. However, experts are questioning whether the central bank has "wildly over-reacted" to inflation?
The central bank has left interest rates unchanged at 5.25% for the second time in a row following this month's monetary policy meeting.
The monetary policy committee voted by a majority of 6–3 to maintain the bank rate, with three members preferring to increase Bank Rate by 0.25 percentage points, to 5.5%.
The six members that voted to maintain the bank rate argued that there had been little improvement in UK economic data since the previous meeting and that GDP growth had weakened.
These members also maintained that the restrictive monetary policy was warranted for an extended period of time to bring inflation sustainably back to the 2% target and indicated that a further rise in bank rate remained a possibility.
However, the three members that voted to increase the rate was swayed by evidence of more persistent inflationary pressures and that an increase was needed this time to address “the risks of more deeply embedded inflation persistence”.
A change of tack
The Bank of England’s (BoE) pausing of rate rises signals that its monetary tightening is far from over, with inflationary pressures still hampering UK businesses.
The decision to pause interest rates is a change of tack for the central bank after hiking the base rate for 14 consecutive times.
The BoE’s decision comes after the US Federal Reserve held interest rates for the second time in a row following 11 increases, and the European Central Bank took the same approach after an aggressive series of rate rises.
Explaining the current economic landscape, the monetary policy statement said there has been an increase in long-term government bond yield across advanced economies since their previous meeting.
It also noted that "GDP growth has been stronger than expected in the United States" and "underlying inflationary pressures in advanced economies remain elevated". It added: "Following events in the Middle East, the oil futures curve has risen somewhat while gas futures prices are little changed."
The Bank of England has used interest rates as the tool in its arsenal as it attempts to stem inflation - but it is still a far way off from meeting its 2% target by the end of 2025. The central bank expects inflation to then fall below the target thereafter, as "an increasing degree of economic slack reduces domestic inflationary pressures".
Explaining that it will have to monitor closely indications of persistent inflationary pressures, the MPC said: "Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit."
Although the central bank has cooled its approach to hiking interest rates, today’s announcement shows that the MPC is still some way off from reversing its current approach.
However, Chancellor Jeremy Hunt was much more positive about the direction of inflation. “Inflation is falling, wages are rising and the economy is growing. The UK has been far more resilient than many expected, but the best way to deliver prosperity is through sustainable growth," he said shortly after the announcement.
“The Autumn Statement will set out how we will boost economic growth by unlocking private investment, getting more Brits back to work, and delivering a more productive British state.”
The impact of inflationary pressures was laid bare in the Q3 insolvency figures released this week, where economic issues contributed to the highest number of corporate insolvencies in more than two decades.
The insolvency service reported that between July and September there were 6,208 (seasonally adjusted) registered company insolvencies, which was 10% higher than the same period last year.
“Sticky inflation, high interest rates coupled with an increase in debt, and the cost of living are still making it tough for businesses to recover post-Covid,” commented Gareth Harris, partner at RSM UK Restructuring Advisory about the effects of the tough economic conditions on businesses.
Has the Bank of England over-reacted?
Richard Murphy, professor of accounting practice at Sheffield University Management School told AccountingWEB: "Discussion about the Bank of England's interest rate decision has focussed on whether it will hold rates rather than increase them, but this entirely misses the point about what is needed now.”
He went on to say that the central bank has “wildly over-reacted” to inflation, which has led to interest rates being already “much too high”.
“That fact, coupled with its current policy of quantitative tightening, which is deliberately inflating current financial market interest rates, means that the impact of high interest rates is now almost wholly destructive on the economy, businesses, households and individuals.
“What we need now are urgent and significant interest rate cuts to reduce the harm already caused and to keep businesses, mortgaged households, renters, local authorities and others going when their financial viability is now under threat, but will the Bank of England do that? I very much doubt it. It's as if they don't care."
What do you think? Have the Bank of England over-reacted? Should lowering interest rates be part of the central bank’s discussions going forward?