UK growth to suffer from interest rates hold, industry warns
The UK economy stands to suffer from high borrowing costs, leading industry figures have warned, after the Bank of England held interest rates at 4.25 per cent on Thursday.
The Bank’s Monetary Policy Committee (MPC) indicated that interest rate cuts could come in the coming months after a recent 25 basis point cut in May.
An agreement to hold interest rates was made due to high inflation expectations, sticky wage growth data and concerns over rallying oil prices due to the emerging conflict between Iran and Israel.
But Bank officials struck a dovish tone on growth as it upgraded its growth forecast for the second quarter of the year despite a 0.3 per cent GDP contraction in April, according to recent data published by the Office for National Statistics (ONS).
Business leaders have warned that a decision to hold interest rates could restrict spending in the UK economy and hit Britons dealing with expensive mortgages and a higher tax burden.
Suren Thiru, economist at the Institute of Chartered Accountants in England and Wales, said a decision to hold interest rates would be a “big blow” to people struggling to pay off bills.
“Though this policy loosening cycle is not yet over, this latest decision is further confirmation that the speed of interest rate cuts remains especially cautious, with policymakers wary over elevated inflation and intensifying international instability,” Thiru said.
MPC signals more interest rate cuts
IPPR director Carsten Jung blamed bumpy growth this year on the Bank’s restrictive monetary policy.
“This year’s GDP growth has been lower than expected, in large part because interest rates are being kept high for long,” Jung said.
“Even when considering still-elevated inflation, the Bank continues to run an overly restrictive policy, and it is harming ordinary households.
Three MPC members, including deputy governor Dave Ramsden, voted for a 25 basis cut, because of a weakened jobs market as shown in data provided by the ONS and various business surveys.
They highlighted wage growth data of 5.2 per cent in the three months to April, which was lower than expected, as a key reason for their vote to be warranted.
Low underlying growth estimates, which the Bank believes to be closer to zero despite positive headline figures in the first quarter of the year, also supported a “less restrictive policy path” as higher interest rates put achieving two per cent inflation in the medium term at risk of being undermined.
Markets predict interest rates to be cut at the next meeting in August. Some economists believe the MPC struck a more dovish tone in the minutes to its latest decision.
Matt Swannell, chief economic adviser to EY Item Club said it was not a surprise interest rates were held this time round.
“With today’s decision seemingly a foregone conclusion, all the focus was on the MPC’s vote split and guidance,” Swannell said.
“Two of [the three] votes came from the Bank of England’s established doves, but a third vote in favour of a reduction at this meeting is probably a sign that the MPC has become slightly more concerned about the labour market than it was in May.
“While it is still clear that the MPC’s confidence in forecasting the outlook remains lower than normal in the face of domestic and geopolitical uncertainty, the minutes suggest that this trade-off is narrowing, as there appears to be a growing consensus amongst rate setters that the labour market is loosening.
“This only raises the bar for the MPC to break from its cut-hold tempo at its August meeting, and opens the door slightly to rate cuts potentially speeding up in the latter half of this year.”