UK Interest Rates are Close to Their Peak

Bank of England Governor, Andrew Bailey, told MPs “we are much nearer now to the top of the cycle” of rate rises. The Bank has hiked rates 14 times in a row as it tries to slow the fastest pace of price rises among the world’s big economies. It is expected to raise borrowing costs again later this month, taking the Bank rate to 5.5%.

The theory is that raising interest rates makes it more expensive to borrow money, meaning people have less to spend, reducing demand and slowing inflation, which is the rate at which prices rise. However, the Bank rate is currently at its highest level for 15 years, and inflation has remained stubbornly high.

Although inflation fell to 6.8% in the year to July – down from 7.9% in June – it is still much higher than the government’s target of 2%.

Speaking to MPs on the Treasury Select Committee, Mr Bailey said there was evidence that it may be slowing.

But it was not clear how much that would reduce the pace of wage growth, which recently hit a record high. Wage growth can bolster inflation.

“Many of the indicators are now moving as we would expect them to move, and are signalling that the fall in inflation will continue and – as I’ve said a number of times – I think will be quite marked by the end of this year,” he said.

“The question now is as headline inflation comes down, will we see inflation expectations continue to come down? And will that be reflected into wage bargaining?” he added.

The S&P Global/CIPS Purchasing Managers’ Index (PMI) for Britain’s services sector dropped to 49.5 in August from 51.5 in July 2023 – a seven-month low but above an initial estimate which showed it matching January’s two-year low of 48.7. Any figure below 50.0 indicates an overall reduction in service sector output.

The broader composite PMI – which also includes a very weak manufacturing PMI – dropped to 48.6 from 50.8, again the lowest since January but revised up from an estimate of 47.9 for August 2023, which was the lowest since January 2021.

Britain’s economic activity may be cooling after the sharp rise in borrowing costs, however rising wages have been a focus for the Bank.

Mr Bailey’s remarks may mean a smaller increase in rates in the coming months than markets had expected. However, he emphasised that the next decision, on 21 September 2023, will still depend on the latest evidence, including data on jobs, growth, wages and inflation.

(Source: BBC / Reuters)

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