Bank of England boss, Andrew Bailey, announced that the bank expects a fall in UK’s inflation this year but pushed its 2% target to the Q4 of 2024. Thus, price surges might continue but the economy will not plunge into recession as previously predicted. This unprecedented shift from BoE’s previous forecast follows the growth of the UK economy by 0.1% in Q1 of 2023.
Bailey vows to “stay the course” as BoE battles UK’s worst inflation in almost five decades
The warning came as the BoE boss announced the 12th straight interest rate hike, increasing its benchmark by 0.25% to 4.5%. He reiterated that the central bank was keen on maintaining its firm stance against inflation until it achieved the 2% target. The country’s inflation remained over 10% in March, and the central bankers expect it to fall more slowly than anticipated.
Consequently, Bailey announced the hike as BoE scrambled to curb the crippling inflation hurting its citizens. He owed the high inflation rates to a persistent rise in food prices and unrelenting wage growth, which will keep inflation high for a while.
Even so, he claimed that the central bank was not signaling its next moves and would rely on future data. Economists predict two more interest rate hikes before the BoE enforces a pause like Jerome Powell, the Fed chairman, did.
In his briefing, Bailey noted that the bank’s decision to hike rates would impact households within the UK adversely, particularly the lower-income ones. In his explanation, the lower income families spend more on food and are thus more prone to be affected by over-the-roof food prices.
In addition, Chancellor Jeremy Hunt pointed out that even with the evasion of recession, the BoE’s announcement would be bad news for families paying mortgages. The central bank explained that the high rates have not yet affected mortgage holders. However, with a scheduled expiration of mortgages belonging to 1.3 million households before the year ends, an average of £200 will be added to their monthly expenses.
UK economy infers a positive outlook as GDP grows in Q1 by 0.1%
The UK economy showed signs of recovery as its GDP grew by 0.1%, in line with forecasts for Q1. Bailey affirmed that contrary to the central bank’s prediction of “a shallow but long recession six months ago,” the revised growth forecast indicates “modest but positive growth.”
He attributed the growth to a fall in energy prices, “better than expected” economic activity, and “lower unemployment.” Even so, the unprecedented March shrinkage by 0.3% underscores its fragility. This fall was a result of widespread decreases within the service sector.
Despite having one of the highest living costs within any major economy due to out-of-control inflation, Bailey claimed, “The economy has turned out to be more resilient than we expected it to be.” He added that were it not for strikes and the recent coronation of King Charles, which led to an extra bank holiday, the growth would have been +0.2% in Q1 and Q2 of 2023.
The Prime Minister, Rishi Sunak, had vowed to halve the inflation earlier this year. Therefore, the government aims for about 5.3% inflation by the end of the year. With the continued rate hikes, households may be affected more by efforts to curb inflation than by modest economic growth.
British lawmakers launch a probe into the country’s food supply chain as inflation remains high
According to official data, the UK saw a 19.1% increase in food prices in March compared to last year. Thus, UK residents are experiencing some of the highest food prices since the 70s. Questions have been raised regarding the continued rise in wholesale food prices within the UK when there is a global decrease.
Because of this, legislators from the Environmental, Food, and Rural Affairs (EFRA) have expressed dissatisfaction with the situation. Additionally, they investigated the country’s wholesale food supply chain on Friday to understand the root cause of the 4-decade high prices. EFRA aimed to examine the sharing of profits and risks along the supply chain from “farm to fork.”
UK inflation has been around 10% since last summer. Source: Bank of England
Moreover, lawmakers will also consider the level of regulation and impacts of external factors like the Russia-Ukraine war and the unprecedented OPEC oil production cuts. The chair of EFRA, Robert Goodwill, expressed that his committee knew the pain felt by UK consumers but was still determining if the inflation affected the other parties up the chain or if they were benefiting from it. He added that EFRA sought to “get to the bottom of what’s going on” and give households within the UK “reasonable prices.”
One Union blamed retailers for excessively “profiteering” from the high prices by “fueling inflation.” However, in his announcement, BoE’s Bailey dismissed the claims that the central bank did not think such manipulation was going on. The central bank chief emphasized that the BoE was not directing blame on workers or enterprises but on the COVID-19 pandemic and the Russian invasion of Ukraine, which are the primary causes of UK inflation.
In addition, supermarkets across the UK have defended their high prices claiming that there is a lag of three to nine months (about the global price change) before the lower prices reflect in shops.
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