Podcast: UK economy after interest rates remain unchanged
02 Jul 2020
No news, good news? Our chief economist Philip Shaw talks about the Bank of England decision to keep interest rates at 0.25%, their latest inflation forecast and what to expect in the medium term.
Listen to the podcast
We’ve just had the decision from the Bank of England on interest rates and the inflation report which fleshes out the Bank’s forecast of the economy over the next three years.
Rate decision by the Bank of EnglandThe Monetary Policy Committee (MPC) of the Bank of England left the level of interest rates on hold at 0.25%. This wasn’t a surprise. A few weeks ago it seemed fairly certain that the MPC would raise rates. However, since then we’ve had various hints from MPC members that it was more likely to keep interest rates on hold this time and that, in fact, was the decision.
The reasoning of the Bank of England was that we’ve seen a spate of weaker economic data recently. The economy barely grew during the first three months of the year, and the Bank of England did not want to respond to that sort of data by raising interest rates, in case that there was something pernicious about the numbers, rather than representing just a temporary economic soft patch, which is what that the MPC believes.
Inflation reportIf you look at the Bank of England’s inflation report, which was published alongside the MPC’s decision, it really doesn’t change the outlook for the economy very much at all.
Granted, we’ve had a few weak months of economic data. But given that the committee believes that that’s just a temporary phenomenon, its outlook was very, very similar to that which it published three months ago.
[The outlook] is that of an economy which is growing a little bit above its potential, where the labour market continues to tighten (in other words, unemployment falls), we begin to see further increases in pay rates, and that puts some inflation pressure in the economy.
Interest rates outlookIn terms of what that means for interest rates, what the Bank of England is really saying is that it wants to continue raising rates very gradually over the medium term. And, in fact, we’ve received a fairly strong hint from MPC members that it’s really looking at three interest rate increases over the next two years or so – so, a very gradual pace of rate hikes.
Now, that’s very much contingent on the economy recovering from the slow start of the year which the Bank of England, and indeed ourselves, expect. If that doesn’t happen, then the idea of higher interest rates would be off the table for quite some time.
Winners and losers: borrowers vs. saversIt’s easy to suggest that it will be borrowers that are the winners from a no-change decision, and savers have lost out on the absence of higher savings rates, but in reality, really what you want is the Central Bank to get the decision right. In general, what is good for the economy is good for
everybody, and not just for borrowers – it’s also the case for savers as we engender stable inflation and a period, we hope, of higher economic growth.
Weaker global economic growth?The broader question, bearing in mind that the Bank of England did not raise rates today, is whether this marks the start of a downturn in the global economy, following a very promising start to this year.
In our view, this isn’t something we should be too concerned about. Expansions don’t move in straight lines, we’ve seen the first few months of this year suffer from some relative soft economic data but for very good reasons, for example, the weather. What we fully expect to see is a bounce back in the pace of growth in the UK over the remainder of the year. And, indeed, if you look at the evidence, through the course of the first four months of this year, we are beginning to see evidence that April has perhaps seen some increase in the pace of growth.
Brexit: what’s in store for you and your business?
As we near the end of the UK’s membership of the EU, our chief economist takes stock of Brexit negotiations, the outlook for sterling, examines difficulties that Britons face and identifies key opportunities.
Investec Derby Festival - The Queen and the Derby
Her Majesty Queen Elizabeth II has missed only two Epsom Derbies since first attending as a Princess in 1946, reflecting the Derby's status as the world's greatest flat race.