Category: Chaos

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Bank of England says inflation rate 5% by Christmas 2023?

Bank Governor

That’s still 3% above the target of 2%

The Bank of England’s forecasting, which has a major impact on the UK economy, is being reviewed and has been criticised.

After the Bank raised interest rates for a 14th time in a row in an effort to slow price rises in Augts 2023, officials have predicted inflation to fall from the current rate of 7.9%, to ‘around 5%‘ by the end of the year. The Bank puts rates up when they are concerned that too much spending will send prices spiralling.

So, in light of its estimating techniques being challenged, how much faith should we put in ‘5% by Christmas’?

For the last two years, the Bank of England has been underestimating the likely rate of inflation in the short term. MPs have been critical of the Bank’s forecast, and its officials have acknowledged they have got some judgements wrong in their forecasting.

The Central Bank has also announced a review into how it makes forecasts.

This was one of the questions put to the Bank of England governor

Mr Baron: Good morning, everyone. In looking at the bank rate going forward, some of us, it is fair to say, have long believed that central banks, including the Bank of England, have been well behind the curve with regard to inflation. As the Chair has said, forecasting has been awry. The Bank of England is one among others that has been too slow in raising interest rates, allowing inflation to mushroom well above the 2% target.

I have put it as strongly as suggesting that it has been a woeful neglect of duty. It is causing real pain out there for people and businesses. We should always remember, as we sit in our, sometimes, white ivory towers, having these debates, that we are talking about people’s lives and businesses that are having to grapple with double-digit inflation and interest rates perhaps going up too quickly. I think that you get it, but it is useful to remind ourselves of that.

Why should the public have confidence in your ability to get it right going forward? What lessons do you think that you have learned? What are you going to do differently? I am not hearing a satisfactory answer to that...

See the full report here – be prepared, it’s an acquired taste and a long read…

More wrong than right

However, some critics have argued that the BoE’s forecasts are often too optimistic or pessimistic, and that they fail to capture the impact of major shocks or structural changes in the economy. For example, the BoE was widely criticised for underestimating the severity of the 2008 financial crisis and overestimating the negative effects of Brexit on the economy. Some have also questioned the usefulness of the BoE’s forecasts for guiding monetary policy decisions, as they may be influenced by political or psychological factors.

Therefore, it may be wise to take the BoE’s forecasts with a grain of salt, and not to rely on them too much for making economic or financial decisions. The BoE’s forecasts are not useless, but they are not infallible either. They are one of many sources of information and analysis that can help us understand the state and prospects of the UK economy, but they should not be treated as gospel truth.

The Bank of England has been wrong with too many forecasts, so why bother? Target 2%, actual above 10%!

I rest my case.

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Bank of England raises interest rate by 0.25% to 5.25% – highest in the G7

Bank of England

15 year high… and counting

The Bank of England (BoE) announced another increase in its base rate, from 5% to 5.25%, the highest level in over 15 years as of 3rd August 2023. This is the 14th consecutive rise since December 2021, when the BoE started to tighten monetary policy in response to rising inflation.

The Bank said that inflation, which fell to 7.9% in June, remained well above its 2% target and that further action was needed to bring it down. It also cited the risks posed by the global economic situation, especially the conflict in Ukraine and the slowdown in China.

Affect on borrowers

The rate hike will affect millions of borrowers and savers across the UK. Fixed-rate mortgages will not change until the end of their term, but new deals will be hit borrowers hard. Savers may see some benefit from higher interest rates, but only if banks and building societies pass on the increase, which they are slow to do.

Bear in mind that for the past 15 years many have benefitted from ultra low interest rates and cheap money, this is not the ‘norm’. And now, as more ‘normal’ interest rates return it will initially disrupt financial stability for some, and it will be difficult for many for a time. But money has been cheap and mortgages have always been the cheapest way to borrow long term and that is still the case – even if it doesn’t feel like it right now.

Expected

The Bank of England’s decision was widely expected by market analysts, but some have warned that further rate rises could damage the UK economy, which is already showing signs of weakness. House prices are falling, manufacturing activity is contracting and consumer confidence is low.

The prime minister, Rishi Sunak, said he was disappointed that inflation was not falling faster, but claimed that he was making progress and that there was ‘light at the end of the tunnel‘.

And a train too if he isn’t careful!

UK has the highest interest rate in the G7

Interest rates have been increasing across the world in recent months.

The Bank of England’s latest rate hike means the UK now has the highest rates in the G7 – a group of the world’s seven largest so-called ‘advanced’ economies.

That’s higher than France, Germany, Italy, Japan, Canada and the U.S.

If you think the UK’s got it bad, spare a thought for these countries where interest rates are rampant

  • Zimbabwe: 95%
  • Argentina: 97%
  • Ghana: 30%
  • Malawi: 24%
  • Iran: 23%
  • Turkey: 10.50%

Let’s not talk about inflation, just yet…

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‘Everything is fine, nothing to see here!’

Downing Street No.10
Downing Street No.10
‘Everything is fine, nothing to see here!’

Dream or reality – did this really happen?

The party-gate scandal lead to SERVING members of the UK government being fined, including the then prime minster (since sacked by the party) – and the then chancellor of the exchequer (now our serving prime minister).

You really can’t make this stuff up.

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Greed or need?

British Gas owner Centrica and Shell see profits soar as bills rise. 

Profit for the six months ending in June 2023 for British Gas owner Centrica rose to around £1.34bn from £262m a year earlier. The rise in profits came from the company’s nuclear and oil and gas business, rather than from the British Gas energy supply business which performed much worse. The average annual British Gas profit has been £584m in recent years.

Profit increase down to Ofgem ‘tweak’

However, the profit boom is surprisingly down to a ‘tweak’ to the regulator Ofgem’s energy price cap that allows the supplier to recover elements of the costs of supplying its 10 million customers during the energy crisis. 

The supplier’s current profit highs are likely to upset consumer groups that have campaigned against the supplier’s treatment of vulnerable energy customers as record energy market prices forced millions into fuel poverty. Some have called the profit making ‘legalised robbery’, and demanded to bring energy into public ownership.

Dividend plans

Centrica plans to raise its interim dividend by around a third but remarks that its underlying profitability will ease significantly in the second half of the year. Energy firms saw their profit margins hit last year when wholesale prices surged in the wake of Russia’s invasion of Ukraine. Wholesale prices also jumped as th UK emerged from the dark cloud Covid as markets undicated that the UK was ill prepared for the enconomic recovery. Brexit blues didn’t help either.

The energy price cap remains £1,000 above its pre-pandemic average, despite oil and natural gas costs easing significantly. It is predicted by industry ‘experts’ to remain around the £2,000 a year average for the coming winter months, maintaining excessive pressure on household budgets.

Some ‘windfall’ tax recovery, over the years will apparently go back to ‘society’, British Gas says.

Centrica chief executive reportedly said that a lot of the firm’s profits were ‘going back into society’.

‘I know it’s difficult to see the word profits, or dividends, or similar words when people are having a tough time. I’m very conscious of this,’ he reportedly said.

Windfall

‘Bear in mind, over the next couple of years we are expecting to pay a windfall tax of ‘probably‘ well over £600m on our UK gas business off the back of the profits that we’re seeing, so a lot of this is going back into society.’

A contentious thought

A business needs to make profits otherwise there is no business. It exits to make a profit and to supply a service or product – but it is about how that business makes its profit, isn’t it?

Token windfall tax temporarily slapped on by the UK government is only payable on UK profits. Oil and gas recovery companies will only pay a tax windfall on UK related profits not on overseas returns!

Profits from fossil fuel recovery invested in greener energy for the future – that’s a topic for another article.

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Inflation in the UK is proving stubborn

Central Banks are struggling to catch-up with inflation

UK inflation rate remains high at 8.7% in May 2023

The UK inflation rate remained at 8.7% in the year to May 2023, according to the latest official figures from the Office for National Statistics (ONS). This is the same rate that was recorded in April, but down from the 10.1% level seen in March.

The ONS said that rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the annual inflation rate. However, these were offset by falling prices for motor fuel and food and non-alcoholic beverages.

The ONS also reported that core inflation, which excludes energy, food, alcohol and tobacco, rose to 7.1% in May, up from 6.8% in April, and the highest rate since March 1992.

‘I’m just taking this calculator thingy to my boss, I thought it might help’. ‘Well, good idea, guess it can’t make it any worse’.

High inflation is the fault of everyone else other than the central bank

The inflation rate is measured by the Consumer Prices Index (CPI), which tracks the changes in the cost of a basket of goods and services that are typically purchased by households. The CPIH, which includes owner occupiers’ housing costs, rose by 7.9% in the year to May, up from 7.8% in April.

The high inflation rate has been driven by a combination of factors, including supply chain disruptions, labour shortages, higher energy costs, and strong consumer demand as the economy recovers from the coronavirus pandemic.

The Bank of England has a target to keep inflation at 2%, but it has said that it expects inflation to rise further in the coming months before falling back next year. The Bank has also signalled that it may raise interest rates sooner than expected to curb inflationary pressures.

However, June’s inflation reading came in below economists expectations at 7.3% A small but welcome reversal of high UK inflation. UK inflation is higher than the EU and U.S.

Are central banks doing a good job at controlling inflation? Bear in mind the inflation target is 2%…