Tag: Bank of England

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Bank of England holds UK interest rate at 4.25%

UK interest Rate

The Bank of England held its base interest rate steady at 4.25% on Thursday 19th June 2025, with a 6–3 vote from the Monetary Policy Committee (MPC).

Three members pushed for a 0.25% cut, but the majority opted for caution amid persistent inflation and global uncertainty.

Inflation ticked up slightly to 3.4% in May, driven by regulated prices and earlier energy cost increases.

While wage growth is easing and the labour market is loosening, the Bank signalled it’s not ready to ease policy further just yet

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UK inflation hits 3.5% in April 2025 as household bills surge

UK inflation up!

UK inflation rose to 3.5% in April 2025, exceeding expectations and placing further financial strain on households.

The increase, reported by the Office for National Statistics, was driven by higher energy costs, water bills, and taxation pressures on businesses.

One of the most striking factors behind the surge was the 26.1% increase in water and sewerage costs, the largest recorded jump since 1988.

This, combined with electricity and gas prices, contributed to the unexpected rise in inflation. Meanwhile, falling fuel prices and clothing discounts helped mitigate some of the upward pressure.

The Bank of England, which had forecasted inflation at 3.4%, may now reconsider its approach to interest rates. A sustained period of inflation over 3% could delay potential rate cuts, impacting mortgage rates and borrowing costs.

Despite concerns, economists believe inflation should gradually ease in the coming months. However, persistent cost pressures on household essentials mean many families will continue to feel the squeeze.

The Bank of England will be closely monitoring economic trends before making further financial decisions.

With inflation unexpectedly climbing, individuals may need to rethink their budgets, spending habits, and savings strategies for the months ahead.

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Bank of England cuts interest rates by 0.25% to 4.25%

BoE

The Bank of England has cut interest rates by 25 basis points to 4.25% on 8th May 2025 marking its fourth reduction since August 2023.

The decision, backed by a majority of the Monetary Policy Committee, reflects easing inflation pressures and a need to support economic growth.

Inflation, currently at 2.6%, is expected to rise temporarily to 3.5% due to household bill increases.

The cut will provide relief to homeowners and businesses facing high borrowing costs.

However, policymakers remain cautious, balancing growth stimulation with inflation control. Markets anticipate further cuts, potentially bringing rates down to 3.25% by year-end.

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UK economy shows welcome signs of resilience with positive GDP growth and inflation relief

Union Jack flag and stocks charts

The UK economy displayed unexpected resilience in February 2025, with GDP growing by 0.5%.

This figure has exceeded market expectations and provided a welcome boost to UK economic confidence. The growth was fueled by robust activity in the services and manufacturing sectors, which helped counterbalance ongoing challenges in other areas.

February’s performance marks a recovery from the flat growth seen in January 2025, underscoring the adaptive capacity of businesses and consumers alike.

Adding to the positive momentum, the Consumer Prices Index (CPI) inflation rate eased to 2.6% in March 2025, down from February’s 2.8%.

The decline in inflation reflects a combination of factors, including falling fuel costs and stable food prices, which have alleviated pressure on household budgets.

This marks the lowest inflation level since late 2024 and aligns with the Bank of England’s goal of achieving price stability.

The interplay of stronger-than-expected GDP growth and easing inflation suggests a cautiously optimistic outlook for the UK economy.

While challenges persist, such as global economic uncertainties and lingering effects of Brexit, these latest figures indicate a potential turning point, despite the Chancellors autumn and spring ‘budgets’.

The UK government and market participants will be watching closely to see if this positive trend continues into the coming months.

See: Office for National Statistics (ONS)

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Bank of England holds interest rate at 4.5%

UK interest rate

The Bank of England (BoE) has decided to maintain its base interest rate at 4.5%, following its latest Monetary Policy Committee (MPC) meeting

The Bank of England has warned economic and global trade uncertainty has ‘intensified’ as it held UK interest rates at 4.5%.

This decision, supported by eight out of nine committee members, reflects the Bank’s cautious approach amidst ongoing economic challenges.

The move comes as inflation remains above the Bank’s 2% target, with the UK Consumer Prices Index (CPI) inflation recorded at 3% in January 2025. Rising energy costs, water bills, and transportation fares have contributed to the persistent inflationary pressures.

Despite these challenges, the UK economy has shown mixed signals, with a slight GDP growth of 0.1% in the final quarter of 2024, followed by a contraction of 0.1% in January 2025.

The BoE’s decision to hold rates steady aims to balance the need to control inflation while supporting economic stability. Governor Andrew Bailey reportedly emphasised the importance of monitoring both global and domestic economic developments closely (that’s useful then – what a good idea).

The MPC’s cautious stance reflects concerns over global trade uncertainties and the potential impact of geopolitical tensions.

While the decision provides some relief to borrowers, it leaves savers and businesses navigating a landscape of economic uncertainty.

Analysts predict that the Bank of England may consider rate cuts later in the year, depending on inflation trends and economic performance.

For now, however, the focus remains on maintaining stability in a forever fast challenging environment.

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UK inflation higher-than-expected at 3% in January 2025

UK Inflation up

UK inflation rose sharply in January 2025 after airfares failed to fall by as much as usual and private school fees jumped.

The higher-than-expected inflation increase to 3% in the year to January 2025, from 2.5% in December 2024, means that consumer prices rose at the fastest rate for 10 months.

Why?

The U.K.’s inflation rate rose sharply to 3% in January, coming in above analyst expectations of a 2.8% reading, according to data released by the Office for National Statistics (ONS) on Wednesday 19th February 2025.

Core inflation, which excludes more volatile items such as energy, food, alcohol and tobacco prices, rose by 3.7% in the 12 months to January 2025, which was up from 3.2% in the previous month.

The ONS reported Wednesday 19th February 2025 that the largest upward contribution to the monthly change in the CPI came from transport and food and non-alcoholic beverages.

Interest rate reductions will likely pause on this news.

I wonder what spin the UK chancellor add.

Not good!

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EEK! Only 0.1% growth for the UK

Tepid UK GDP

The U.K. economy grew by just 0.1% in the fourth quarter according to a preliminary estimate from the U.K.’s Office for National Statistics (ONS) released Thursday 13th February 2025.

Economists had expected the country’s GDP to contract by 0.1% over the period.

The services and construction sectors contributed to the better-than-expected performance in the economy, up 0.2% and 0.5% respectively, but production fell by 0.8%, according to the ONS.

Sluggish growth

The UK economy recorded zero growth in the third quarter, accompanied by lacklustre monthly GDP. There was a 0.1% contraction in October 2024 followed by a 0.1% expansion in November 2024.

On Thursday 13th February 2025, the ONS that growth had picked up in December, with an estimated 0.4% month-on-month expansion attributed to growth in and production.

Sluggish and a recent decline in inflation prompted the Bank of England to implement its interest rate cut of the year last week, reducing the benchmark rate to 4.5%.

The central bank indicated that additional rate cuts are anticipated as inflationary pressures diminish. However, it noted that higher energy costs and regulated price changes are projected to increase headline inflation to 3.7% in the third quarter of 2025.

Pressure

The expectation is that UK underlying inflationary pressures will continue to decline. The Bank of England expects the inflation rate to return to its 2% target by 2027.

The bank also halved the U.K.’s economic growth forecast from 1.5% to 0.75% this year.

Poor economic performance will add additional pressure on U.K. Chancellor Rachel Reeves, whose fiscal plans have been criticised for increasing the tax burden on businesses.

Critics say the plans, which increase the amount that employers pay out in National Insurance (NI) contributions as well as a hike to the national minimum wage, could harm investment, jobs and growth. This appears to be coming to fruition.

Chancellor Reeves defended her ‘dire’ Autumn Budget reportedly saying the £40 billion of tax rises were needed to fund public spending and that she is prioritising economic growth.

A poor start – 0.1% is an anaemic growth percentage!

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Bank of England cuts interest rate to 4.50% and cuts growth forecast for 2025

BoE

The Bank of England has halved its growth forecast for 2025 as it cut interest rates to 4.50% – the lowest for around 18 months

The economy is now expected to grow by 0.75% in 2025, the Bank of England reportedly said, down from its previous estimate of 1.5%.

Not good news for the chancellor, Rachel Reeves.

Bank of England cuts interest rates to 4.5% amid economic slowdown

The Bank of England announced a reduction in its benchmark interest rate from 4.75% to 4.5%, marking the third cut since August 2024.

This decision comes as a response to the ongoing economic challenges facing the UK, including sluggish growth and concerns about the potential effect of Trump’s tariffs.

The primary reason behind this rate cut is the Bank’s effort to stimulate economic activity by making borrowing cheaper.

With the cost of borrowing now at its lowest level since June 2023, homeowners with variable rate or tracker mortgages will see immediate relief, with monthly repayments expected to decrease by approximately £29 per month on an average mortgage.

Small businesses, which have been struggling under heavy borrowing burdens, are also expected to benefit from this move.

Growth concerns linger

The Bank’s decision follows a series of disappointing economic indicators. The latest GDP figures showed that the economy only grew by 0.1% in November 2024, falling short of economists’ forecasts.

This sluggish growth, coupled with two months of falling output, has led the Bank to revise its growth forecast for 2025 downward.

The Bank now anticipates no growth during the fourth quarter of the year, and some economists are predicting as many as six rate cuts this year, potentially bringing the rate down to 3.25%.

While the rate cut is expected to provide some relief to borrowers, it also raises concerns about the long-term impact on savings and investment. With interest rates at historic lows, savers may find it challenging to earn meaningful returns on their deposits.

Additionally, the low-interest rate environment could encourage excessive borrowing and lead to asset bubbles, posing risks to financial stability. Has inflation finished?

The Bank of England’s decision to cut interest rates to 4.50% is a strategic move aimed at boosting economic activity and providing relief to businesses and homeowners.

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UK FTSE 100 back in favour as it breaks new highs!

FTSE 100

The FTSE 100, the UK’s premier stock market index, has recently reached unprecedented new highs, marking a significant milestone in the UK financial world.

On 20th January 2025, the FTSE 100 closed at a record high of 8,548, surpassing the 8,500 barrier for the first time.

This achievement is a testament to the resilience and strength of the UK’s largest companies, even amid global economic uncertainties.

Several factors have contributed to this remarkable performance. Firstly, the anticipation of potential interest rate cuts by the Bank of England has fueled investor optimism. Lower interest rates typically reduce borrowing costs for companies, encouraging investment and expansion, which in turn boosts stock prices.

Additionally, the recent rise in oil prices has significantly benefited major oil companies like BP and Shell, which are key components of the FTSE 100.

FTSE 100 reaching new highs – one month chart as of 22nd January 2025 (08:21)

The banking sector has also played a crucial role in driving the index higher. With full-year earnings reports expected soon strong performance from banks could further propel the FTSE 100.

Furthermore, the index’s composition, which includes a substantial number of companies with global operations, has allowed it to benefit from the weaker pound. A weaker pound makes UK exports more competitive and increases the value of overseas earnings when converted back to sterling.

Market analysts are now speculating whether the FTSE 100 could reach the 9,000 mark in the coming months. While this would represent a significant rise from current levels, it is not entirely out of reach given the current momentum and favorable economic conditions.

However, some caution that the index’s rapid ascent may be followed by periods of volatility, especially as global economic conditions evolve.

In conclusion, the FTSE 100’s recent surge to new highs is a reflection of the robust performance of its constituent companies and the broader economic environment.

As investors continue to navigate the complexities of the global market, the FTSE 100 remains a key barometer of the health and vitality of the UK economy.

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UK economy had zero growth between July and September 2024 – bad to worse

UK economic data

Revised official figures indicate that the UK economy was weaker than initially estimated between July and September 2024. The economy experienced zero growth in these three months, down from an earlier estimate of 0.1%.

UK Chancellor, Rachel Reeves reportedly stated that the challenge to fix the economy “after 15 years of neglect is huge,” and October’s Budget would “deliver sustainable long-term growth, putting more money in people’s pockets.”

However, one of the UK’s leading business groups, the CBI, said its latest company survey suggested “the economy is headed for the worst of all worlds.”

The downward revisions will be a setback for Labour, which has prioritised boosting economic growth. It has promised to deliver the highest sustained economic growth in the G7 group of wealthy nations.

Separate figures released last week showed that inflation, the rate at which prices increase over time, is rising again at its fastest pace since March 2024. But it is close to the Bank of England target of 2%

The Bank of England voted to hold interest rates at the last meeting, stating that it believed the UK economy had performed worse than expected, with no growth between October and December 2024.

Businesses have warned that measures announced in October’s Budget, including a rise in employer national insurance and a higher minimum wage, could force them to raise prices and reduce the number new jobs.

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UK inflation rate rises to 2.6% to hit highest level since March 2024

The UK inflation rate has gone up for the second month in a row, rising at the fastest pace since March 2024. The UK inflation rate rose to 2.6% in the year to November 2024, according to official figures.

However, the rise was predicted by economists and was apparently within the range of the expected increase anticipated.

Fuel and clothing were significant contributors to the increase. Additionally, rising ticket prices for concerts and theatrical performances played a role according to data from the Office for National Statistics (ONS).

The Bank of England raises interest rates to maintain inflation at its target of %. The next rate decision is on Thursday 19th December 2024 and economists anticipate that rates will remain at 4.75%.

Prices for food and non-alcoholic drinks, alcohol and tobacco, and footwear all rose at a faster pace last month.

A wider measure of inflation showed housing and household services costs, including rent, rose by 3.5%.

UK inflation 2016 – 2024

UK inflation 2016 – 2024
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Bank of England lowers UK interest rate by 0.25% to 4.75%

Interest rate down

The Bank of England cut interest rates by 0.25% Thursday 7th November 2024, even as Labour’s budget announcement confuses the outlook for future policy easing.

The anticipated reduction, marking the central bank’s second this year, lowers the key rate to 4.75%.

Financial markets had forecast a high probability of the quarter-point decrease at the November 2024 meeting, although analysts cautioned that future cuts might be postponed due to the Labour government’s tax-and-spend budget.

Investors are now awaiting remarks from Governor Andrew Bailey and his team regarding their updated economic forecast following the budget and the U.S. presidential election.

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UK inflation in surprise fall to 1.7%

UK Inflation down below target

UK inflation fell unexpectedly to 1.7% in the year to September 2024, the lowest rate in three-and-a-half years

This indicates that inflation, which is the rate at which prices increase over time, is currently below the Bank of England’s target of 2%, potentially leading to further reductions in interest rates next month.

The Office for National Statistics (ONS) reported that petrol and diesel prices saw a notable decrease, falling by 10.4% in September 2024compared to the same month the previous year.

Additionally, the cost of fares for domestic, European, and long-haul flights contributed to the lower inflation rate. While fares typically decrease after the summer peak, this year they have reduced more than usual.

UK interest rate at 1.7% below the Bank of England target of 2%

UK interest rate at 1.7% below the Bank of England target of 2%

With inflation dropping below economists’ expectations, the markets are anticipating a cut in interest rates at the Bank of England’s upcoming meeting in November 2024. The present rate stands at 5%, and a reduction of 0.25% is now deemed highly probable.

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UK inflation rate climbs to 2.2%

UK inflation

The UK’s inflation rate has risen for the first time this year, official ONS figures show.

This indicates that overall prices increased by 2.2% in the year leading up to July, a rise from 2% in June, surpassing the Bank of England’s target.

The anticipated increase is primarily attributed to the less significant drop in gas and electricity prices compared to the previous year.

The Bank of England reportedly anticipates a further increase in inflation this year before it declines again.

The core inflation rate, which is the Consumer Price Index (CPI) excluding food, energy, alcohol, and tobacco prices, was reported at 3.3% in July, a slight decrease from 3.5% in June, according to the statistics office.

Additionally, service inflation, which the Bank of England (BoE) monitors closely, decreased to 5.2% in July from 5.7% the previous month, yet still remains elevated.

These inflation statistics follow the release of data on Tuesday 13th July 2024, which revealed that the average wage growth excluding bonuses was 5.4% from April to June year-on-year, the lowest in two years.

Concurrently, the unemployment rate dropped to 4.2% during this period, down from 4.4% between March and May 2024.

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Bank of England cuts rate to 5.0% – the first since the Covid pandemic of March 2020 and from the highest rate for 16 years

Bank of England

The Bank of England (BoE) on Thursday 1st August 2024 announced its first-interest rate reduction in more than four years, taking the key rate to 5%.

Although numerous analysts predicted that the Bank of England might announce a reduction in interest rates at its August 2024 meeting, the absence of definitive signals from the central bank left the decision clouded in uncertainty.

The Monetary Policy Committee (MPC) ultimately cast a 5-4 vote in favour of the reduction, with Governor Andrew Bailey stating that the committee would proceed with caution.

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“I’ve been saving this for a rainy day, Mr. Sunak – but I think you might need it now.”

Umbrella for Sunak

Bank of England offers no election help to Rishi Sunak as the UK interest rate is held at 5.25%. Not that they should.

But the UK inflation is on target now at 2% so that’s some consolation. The PM claimed credit as the inflation target was met – happily informing us that his plan was working. But isn’t it the job of the Bank of England to maintain inflation at 2%?

Not that they have done a very good job of that either.

Soggy wet politics!

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No change as Bank of England holds interest rate at 5.25%

UK interest rate

UK interest rates have been left unchanged at 5.25% by the Bank of England (BoE)

The Bank has maintained the interest rates at 5.25% for the seventh consecutive time to combat inflation, resulting in increased mortgage repayments and higher savings rates.

The interest rates, at their peak for the past 16 years, have been sustained at 5.25%. Currently, there are indications of a shift in stance, with a growing consensus for a potential reduction in August 2024.

UK interest rate and inflation chart June 2021 – June 2024

UK interest rate and inflation chart June 2021 – June 2024
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UK hits 2% Bank of England’s inflation target for the first time since 2021

THERE ARE TWO I'S IN INFLATION!

Inflation has reached the Bank of England’s target for the first time in nearly three years, having soared to 11.1% in October 2022, the highest in over four decades – driven by a spike in energy and food prices following the pandemic and Russia’s invasion of Ukraine.

In the year leading up to May 2024, prices increased by 2%, a decrease from the 2.3% rise in the previous month, according to official statistics.

The economy remains a central issue in the lead-up to the general election on July 4th, with all major parties discussing strategies to manage the cost of living.

This discussion precedes the Bank of England’s upcoming decision on UK interest rates this due on 20th June 2024.

The bank is anticipated to maintain the rate at 5.25% – a peak not seen in 16 years – for the seventh consecutive meeting, with the market not expecting a reduction until August 2024.

The decline in May’s inflation rate was attributed to slower price increases for food and soft drinks, recreation and culture, and furniture and household items.

Fuel pump prices remain high.

The inflation target has been achieved – it must be time for a reduction in interest rates.

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Banknotes with King Charles III enter circulation for the first time

King Charles on a Five Pound Note
Banknotes featuring a portrait of King Charles III entered circulation on Wednesday 5th June 2024.

Banknotes featuring a portrait of King Charles III entered circulation on Wednesday 5th June 2024.

Charles’s portrait will be featured on the front of the £5, £10, £20, and £50 banknotes, visible through the notes’ transparent security window. He is only the second monarch to appear on British banknotes, following Queen Elizabeth II.

Currently, there are more than 4.6 billion Bank of England notes in circulation, with a combined value of around £82 billion.

Bank of England

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IMF recommends UK interest rates should be cut to 3.5% by end of 2025

UK Charts

The International Monetary Fund (IMF) advises that the Bank of England should contemplate reducing its interest rates to 3.5% by the end of 2025.

This suggestion is made as the UK’s economy steadily recovers from the recession caused by the pandemic, while policymakers are dealing with inflationary challenges.

The ‘thinking’ behind the recommendation

Economic Recovery and Inflation Outlook

The IMF’s recommendation is grounded in its assessment of the UK’s economic trajectory.

Growth Forecast

The International Monetary Fund has upgraded its growth forecast for the UK in 2024, signaling a positive outlook. It anticipates growth of 0.7% this year and 1.5% in 2025.

Inflation

The IMF anticipates that UK inflation will decline to near the Bank of England’s target of 2% and stabilise at this rate in early 2025, indicating that inflationary pressures are within manageable limits.

Soft Landing

The UK economy is said to be approaching a ‘soft landing‘ following the mild recession of the previous year. Policymakers are focused on finding a balance between fostering growth and managing inflation.

Monetary Policy Considerations

The Bank of England’s Monetary Policy Committee (MPC) has been closely monitoring economic indicators and inflation trends. Here’s why the IMF’s recommendation matters:

Interest Rate Peaks

The Monetary Policy Committee has indicated that interest rates might have reached their peak. The current restrictive monetary policy is having an impact on the actual economy and the dynamics of inflation.

Market Expectations

Analysts anticipate the first interest rate cut by September 2024 at the latest. Market expectations align with this projection, with the base interest rate likely to be lowered to 4% by the end of 2025.

Balancing Act

Policymakers face the delicate task of supporting economic recovery while preventing runaway inflation. The IMF’s suggestion aims to strike this balance.

Implications for Borrowers and Savers

Mortgage Holders

Variable Rate Mortgages

If you have a variable rate mortgage, a rate cut could reduce your monthly payments. However, keep an eye on your lender’s response to any rate changes.

Fixed Rate Mortgages

Fixed-rate borrowers won’t immediately benefit from rate cuts, but they should still monitor the situation. If rates continue to fall, refinancing might become attractive.

Savers

Savings Accounts

Lower interest rates typically lead to diminished returns on savings accounts. It may be wise to diversify your investments to seek potentially higher yields in other areas.

Fixed-Term Deposit

Current fixed-term deposits will remain unaffected; however, new deposits might generate lower yields. It is advisable to carefully assess your alternatives.

Conclusion

The IMF’s recommendation highlights the intricate balance between fostering economic recovery and managing inflation. As the Bank of England considers its next steps, it is crucial for borrowers and savers to remain informed and adjust their financial strategies as needed.

For homeowners, investors, and savers alike, grasping the potential consequences of rate cuts is key to making well-informed choices in an ever-changing economic environment.

Disclaimer: The information provided here is based on current projections and should not be considered financial advice. It is not given as financial advice – it is for discussion and analysis only!

Consult a professional advisor for personalised recommendations.

Remember – always do your careful research first!

RESEARCH! RESEARCH! RESEARCH!

Update

The Bank of England has given its strongest hint yet that interest rates could be cut this summer. This comment was observed in a recent speech given by the deputy governor of the Bank of England.

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UK headline inflation rate falls to lowest in three years but comes in hotter than expected

The April inflation came in higher than anticipated, falling to 2.3%, as reported by the Office for National Statistics on Wednesday 22nd May 2024.

Traders have now reduced their expectations of a June interest rate cut by the Bank of England (BoE). Markets reacted negatively in early trading.

The headline inflation rate decreased from 3.2% in March, marking the first instance since July 2021 that inflation has fallen below 3%, nearing the Bank of England’s target of 2%.

Contrary to the predictions of economists surveyed by Reuters, who expected a more significant drop to 2.1%, services inflation – a critical indicator monitored by the BOE due to its significance in the UK economy and as a gauge of domestically generated price increases – only fell marginally to 5.9% from 6%, missing the anticipated 5.5% from the BOE.

Core inflation, which excludes energy, food, alcohol, and tobacco, decreased to 3.9% in April from 4.2% in March.

The substantial decline in the headline rate was largely anticipated due to the year-on-year decrease in energy prices. However, investors shifted their attention to core and services inflation following indications from BOE policymakers of a potential interest rate cut later in the summer, contingent on new data.

After the data release, the market-makers probability of a June rate cut plummeted to 15% from 50% and the chance of an August cut also fell to 40% from 70%.

Lingering concerns over underlying inflationary pressures mean a June rate cut is unlikely. However, these figures may convince more rate setters to vote to ease policy, providing a signal that a summer rate cut is still a possibility.

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UK interest rate held at a 16-year high as Bank of England holds rates at 5.25%

On hold

The decision comes as inflation, which measures price rises over a period of time, remains above the Bank’s 2% target at 3.2%. But bank says cuts are coming.

Is the 2% target still a sensible benchmark?

The 2% inflation target set by central banks has been a widely adopted benchmark for monetary policy.

History

The 2% inflation target became prominent in the 1990s and early 2000s. Central banks, such as the Federal Reserve and the Bank of England, have aimed to maintain inflation at this level.

The Federal Reserve has typically pursued an inflation rate of about 2% since 1996.

In January 2012, then-Fed Chairman Ben Bernanke formally established the 2% target, and subsequent Fed chairs have continued to endorse this rate as the preferred level of inflation.

Why the 2% target?

Price stability

The 2% inflation target was selected as it provides a balance between preventing problematic inflation and avoiding damaging deflation. Does it work?

Avoiding deflation

Deflation, characterized by falling prices, can hinder economic growth. Central banks target a 2% inflation rate to avert deflation and ensure stability.

Creditor-Debtor compromise

The 2% inflation target represents a balance between creditors’ preference for lower inflation and debtors’ inclination towards higher inflation.

Challenges

Changing economic environment

In recent years, the global economy has encountered distinct challenges, including sluggish growth, technological upheavals, and demographic changes. Consequently, there is a debate on whether the 2% inflation target requires reassessment.

Persistently low inflation

Despite the efforts of central banks, inflation has persisted below the 2% mark in numerous advanced economies, sparking debates over the potential need to modify the target.

Trade-offs

Aiming for a 2% inflation rate can occasionally clash with other policy objectives, like employment or financial stability. It’s crucial for central banks to judiciously manage these competing priorities.

Revision

Several central banks are revising their strategies. For example, the European Central Bank (ECB) has adopted a more adaptable inflation target, permitting temporary exceedances to balance out extended periods of below-target inflation.

The Bank of England also considers broader economic factors when setting policy, rather than rigidly adhering to the 2% target.

IIn summary, although the 2% inflation target has been a helpful benchmark, central banks are progressively willing to adjust their strategies in response to evolving economic conditions. The current debate focuses on striking an optimal balance between stability, growth, and adaptability.

Central banks saw this period of inflation as ‘transitory’ – it wasn’t. It could be argued that their lack of action led to a bigger inflation problem overall.

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FTSE 100 in record territory

The FTSE 100 soared past 8300, reaching a new record high amid busy trading as London markets reopened after the bank holiday.

A catch-up trading session is evident, with mainland-listed stocks having a robust session on Monday 7th May 2024 and continuing to rise. The FTSE reached around 8335 in intraday trading.

Wall Street also experienced another positive session, with the Dow Jones climbing for the fourth consecutive day following the Federal Reserve’s less aggressive stance, and the S&P 500 gaining too. Despite mixed results, earnings have bolstered risk appetite. The low U.S. job count has encouraged traders/investors to take heart that rate cuts will be on the agenda again soon, even if they are now late.

Bank of England

Attention will now turn to the Bank of England (BoE), which faces a decision on whether to guide the market towards a rate cut – the first in four years – or to exercise more patience. The consensus is that it’s premature for a cut this week, with August 2024 being the more likely date, although the Monetary Policy Committee’s (MPC) opinions vary.

Last month the Deputy Governor of the BoE, indicated his readiness to vote for a rate cut with little additional evidence of declining inflation, highlighting the ‘downside risks’ to the BoE’s February inflation forecast. In contrast, the Bank of England’s Chief Economist, expressed a more cautious stance in April regarding the initiation of rate cuts.

Inflation

Inflation is on a downward trajectory, expected to return to 2% in the next few months. CPI decreased from 3.4% to 3.2% between February and March 2024, and core inflation dropped from 4.5% to 4.2%. However, the BoE is likely to await April’s data before taking any decision.

Persistent wage growth of around 6% indicates continued strength in the labour market. Financial markets anticipate a Bank of England rate cut by August 2024, but it is believed the BoE may be prepared to act as early as June 2024, aligning with the anticipated policy move by the ECB.

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Bank of England school report: must try harder – a brutal analysis of ‘out of date’ systems

Bank of England forecasts

The Bank of England (BoE) stands as a bastion of economic stability, guiding the United Kingdom through the ebbs and flows of financial tides. 

Modernising the Bank of England’s forecasting system has become a critical necessity. A recent independent review has cast a spotlight on the ‘serious deficiencies’ within its economic forecasting system, calling for an urgent modernisation.

Out of date forecasting methods

What have they all been doing for all these years to not have updated their systems?

The review, led by Dr. Ben Bernanke, a former chair of the U.S. Federal Reserve, paints a picture of an institution grappling with outdated systems and under-investment in critical infrastructure. The Bank’s staff, the report suggests, are hindered by software that is not just out-of-date but also complicates the already intricate task of economic forecasting.

This revelation comes at a time when accurate economic forecasting is more vital than ever. The world is still reeling from the effects of the pandemic, the 2008/2009 financial crisis and the UK faces unique challenges post-Brexit. The Bank’s ability to predict economic trends accurately is paramount in crafting policies that safeguard the nation’s financial health.

Deficiencies

The deficiencies highlighted are not just a matter of outdated software; they reflect a deeper need for a paradigm shift in how economic data is handled and analysed. The report recommends a complete overhaul of the system, emphasizing the need for automation of tasks that are currently performed manually.

Governor Andrew Bailey’s reportedly responded to the review by acknowledging the gravity of the situation, stating that updating the Bank’s systems is a ‘high priority’. This commitment to modernisation is a step in the right direction, but it should be followed by swift and decisive action, surely.

A broken compass?

The Bank of England’s forecasting system is more than a tool; it is the compass by which the nation navigates its economic future. Modernising this system is not just a recommendation; it is an imperative. As the UK charts its course in a rapidly changing global economy, the reliability and sophistication of its economic forecasting are not just beneficial but essential for continued prosperity.

In conclusion, the Bank of England’s economic forecasting system is at a crossroads. The call to modernise is clear, and the path forward must be paved with innovation, investment, and a steadfast commitment to excellence in economic stewardship.

The future of the UK’s economy depends on it.

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UK inflation down to 3.4% in February 2024

UK inflation

In February 2024, inflation decreased to 3.4%, a decline from January’s 4%, moving closer to the Bank of England’s self-imposed target of 2%


This reduction signifies that the cost of living is increasing at its least rapid rate since September 2021, when it was recorded at 3.1%.

Since reaching a peak of 11.1% in October 2022, the highest in 40 years, inflation has been on a steady decline. In the big inflation picture, that’s a pretty good result.

It has only taken around 16 months to move the rate from 11.1% (a 40-year high) down to just 1.4% above the BoE’s target of 2%.

The primary factor contributing to this decrease, as reported by the Office for National Statistics (ONS), is the deceleration of food price inflation.

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Bank of England holds interest rate at 5.25%

BoE

UK interest rates have been left unchanged at 5.25% by the Bank of England as widely expected by commentators.

It is the fourth time in a row the Bank has held rates at 5.25%.

The Bank of England had previously raised rates 14 times in a row to curb inflation, leading to increases in mortgage rates but also creating better rates for savers.

Interest rate chart from 2007 to January 2024 demonstrates just how low interest were between 2009 and 2022

Interest rate chart from 2007 to January 2024 demonstrates just how low interest were between 2009 and 2022

Attitude shift

There is a noticeable shift in opinion as the committee entertained the possibility of discussing the feasibility of cuts.

There was a three-way split, with two members of the Monetary Policy Committee (MPC) voting to increase the bank rate to 5.5%; one to reduce it to 5%; and six were in favour of sticking with 5.25%.

With inflation falling it is very likely the interest rates will be reduced by 0.25% by March 2024. Just take a look at the reduction in savers rates that have already occurred.

The anticipation is for a rate reduction soon.

The clue is that savers rates are being cut.

But

The Bank of England Governor, Andrew Bailey, has made clear that for him the key question is: ‘For how long should we keep rates at the current level?’

There may be disappointment ahead then – but a rate cut is next and I still expect it by Easter.