The International Monetary Fund (IMF) is an international organization that monitors the health of the global economy and provides financial assistance to countries in need.
UK interest rate warning from the IMF
The IMF has warned that the UK faces another five years of high interest rates to stem rising prices, which have been falling but remain stubbornly above target.
The IMF expects the UK to have the highest inflation and slowest growth next year of any G7 economies, which includes the US, France, Germany, Canada, Italy and Japan.
The IMF says the UK’s immediate prospects are being weighed down by the need to keep interest rates high to control inflation, which is partly caused by the terms-of-trade shock from high energy prices, the aftereffects of the global pandemic, Brexit fallout and the Russia/Ukraine war.
Peak at 6%!
The IMF believes Bank of England rates will peak at 6% and stay around 5% until 2028. Rates are currently 5.25%.
According to the Office for National Statistics (ONS), the UK’s inflation rate dropped unexpectedly in August 2023 to its lowest level since the start of Russia’s invasion of Ukraine, which led to sharp rises in energy and food costs which were already on the rise due to the pandemic.
The Consumer Prices Index (CPI) rose by 6.7% in the 12 months to August 2023, down from 6.8% in July. The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 6.3% in the 12 months to August 2023, down from 6.4% in July.
The ONS said that the main factors behind the fall in inflation were lower prices for clothing, footwear, and second-hand cars, partly offset by higher prices for transport services and recreational goods.
UK Inflation 1989 – 2023 (ONS data)
The ONS also said that the inflation rate was still high compared with historical levels, and that it expected it to rise further in the coming months due to increases in energy bills and supply chain pressures.
Chancellor Jeremy Hunt said the news showed ‘the plan to deal with inflation is working’. Well Jeremy, your comments are encouraging – if you truly believe a 0.1% fall in inflation is ‘working‘. Where were you when the Bank of England lost control of the ‘2% inflation remit’.
‘Don’t worry – the money is being printed as we speak. Come and get your share now!’
Where were you when the excessive ‘uncontrolled’ government borrowing infected the UK’s economy? With all that ‘free’ money sloshing around the system, what did you really expect would happen..?
The latest inflation figures for the U.S. show that the annual inflation rate rose to 3.7% in August 2021, up from 3.2% in July 2021. This was mainly driven by a sharp increase in energy prices, which jumped up 10.5% over the last month. Gas (petrol) prices accounted for more than half of the increase in the overall inflation rate.
Core inflation
However, core inflation, which excludes the volatile food and energy sectors, slowed down to 4.3% in August 2021, down from 4.7% in July 2021. This suggests that the Federal Reserve’s ’11’ rate hikes are having some effect on cooling the inflationary pressures in the economy. Some sectors, such as used cars, medical care services and airfare, saw price decreases in August 2021.
Will the Fed keep interest rates unchanged at its next meeting on September 20, 2021, as we wait to see the full impact of its previous rate hikes on the economy?
However, the Fed may still raise interest rates later this year if inflation remains persistently above its target of 2%. Higher interest rates could introduce more volatility to the U.S. economy and potentially trigger a recession.
According to the Office for National Statistics (ONS) – Inflation fell to 6.8% in the year to July 2023, down from 7.9% in June. A reduction was anticipated by analysts, and there are signs the cost of living could be easing finally, after figures on Tuesday revealed wages rose 7.8% annually between April and June 2023. But inflation and therefore prices remain high, placing pressure on household finances.
When the rate of inflation falls, it does not always mean that prices are coming down, but that they are likely to rise less quickly. A fall in gas and electricity prices last month helped drive inflation lower. The cost of some food food items, such as milk, bread and cereals had come down, but that food prices are still some 15% higher than they were in July 2022.
Core inflation
However, according to the ONS figures core inflation a figure which strips out the price of energy, food, alcohol and tobacco, remained unchanged in July at 6.9%. With inflation still more than three times the Bank of England’s 2% target, many ‘experts’ expect the UK’s central bank to raise interest rates again in September 2023.
The Bank has steadily hiked interest rates to 5.25%, the highest level in 15 years, meaning mortgage costs have jumped dramatically, but on the flipside savings rates have increased too for the first time since the financial crisis of 2008.
Working?
The Chancellor said July’s figures on the cost of living showed the action the government had taken ‘is working’.
Comment
Well… it’s ‘working‘ in the sense it is having the desired affect to reduce inflation – (that both the government and the Bank of England were way behind on) – but it isn’t helping the economy, as interest rates climb making it more expensive for businesses and consumers to function.
But, at least wages are going up now thanks to all the strikes! This will ultimately add more inflationary pressure in the short term.
U.S. consumer prices rose a mild 0.2% in July, but the rate of inflation rose for the first time in more than in a year in a sign it’s going to take a while to get the cost of living fully under control. But a steady slowdown in inflation over the past year could keep the Federal Reserve on the sidelines when officials consider whether to raise interest rates again at their next meeting in September.
The yearly rate of inflation, rose to 3.2% from to 3% in the prior month. It’s the first increase in 13 months, though inflation has eased considerably since hitting a 40-year high of 9.1% in 2022. The core rate of inflation, which omits volatile food and energy costs, also rose 0.2% last month.
The increase in core inflation over the past year slowed slightly to 4.7% from 4.8%. That’s the lowest rate in almost two years. The Fed doesn’t ignore food and energy prices, but the central bank views the core rate as a better predictor of inflation trends. Even so, the core rate of inflation remains well above the Fed’s 2% goal.
Rapid rate rise
Over the past year the U.S. central bank has been raising interest rates rapidly to try to slow the economy and dampen inflation, but it’s unclear if the Fed will continue to do so at its next meeting in September 2023. Financial markets put the odds close to zero.
Inflation has slowed sharply in the first half of 2023, but further gains this year are unlikely to come as easy. U.S. gas (petrol) prices are on the rise again. U.S. rent and house prices are still going up. And labour costs are increasing more than 4% a year, making it harder for the Fed to achieve its inflation target.
Robust economy
The U.S. economy, for its part, is still expanding at a surprisingly robust pace. Strong consumer demand could keep prices elevated, especially for popular services such as hotel rentals, dining out and entertainment.
Whether inflation is still rising too fast for the Fed to necessate another rate hike in September remains to be seen, for now.
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%!
According to the chancellor Jeremy Hunt, the UK economy is caught in a trap
The UK and other advanced economies are facing a low-growth trap that is hard to escape. This means that the potential growth of the economy, which depends on factors such as productivity, innovation, investment, and labour force, is very low and insufficient to meet the demand and expectations of the people.
Brexit
The UK economy has been hit by huge global shocks that have disrupted its normal functioning and recovery. These include the Covid-19 pandemic, which caused lockdowns, restrictions, and health crises; the energy crisis, which led to soaring gas prices and supply shortages; and the Brexit transition, which created uncertainty and trade barriers.
Inflation
The UK economy is also struggling with high inflation, which erodes the purchasing power of consumers and businesses. Inflation is driven by various factors, such as rising energy costs, global supply chain bottlenecks, labour shortages, and pent-up demand.
‘Don’t you just love numbers?’
The Bank of England has raised interest rates to 5.25% as of August 2023 – the highest level since 2008, to curb inflation and maintain price stability. The Bank of England inflation target is 2%.
The plan?
The chancellor reportedly has vowed to stick to the plan that he believes will bring down inflation and boost growth in the long term.
He said that he will unveil a plan in the autumn statement that will show how the UK can break out of the low-growth trap and become one of the most entrepreneurial economies in the world. He also said that he will not ‘veer around like a shopping trolley‘ and change course in response to short-term pressures.
Euro zone inflation fell in July, and new growth figures showed economic activity picking up in the second quarter of this year, but economists still fear a recession.
Headline inflation in the EU was 5.3% in July, according to preliminary data released end of July 2023, lower than the 5.5% registered in June. However, it still remains substantially above the European Central Bank’s 2% target.
EU GDP
GDP growth accelerated in the second quarter, expanding by 0.3%, higher than the 0.2% expected by analysts.
The UK is facing a cost of living crisis as inflation has soared to its highest level in decades. The Bank of England has raised interest rates 13 times since December 2021 in an attempt to bring inflation back down to its original target of 2%. But what does this mean for consumers, savers and borrowers?
What is inflation and why is it rising?
The current UK interest rate is now: 5.0%
Inflation is the term used to describe rising prices. How quickly prices go up is called the rate of inflation. Inflation affects the purchasing power of money, meaning that the same amount of money buys less goods and services over time.
The rate of inflation in the UK is measured by two main indicators: the consumer price index (CPI) and the retail price index (RPI). The CPI is based on a basket of products and services that people typically buy, while the RPI also includes mortgage interest payments.
According to the Office for National Statistics (ONS), the CPI inflation rate was 8.7% in the year to May 2023, while the RPI inflation rate was 11.4%. This means that on average, prices were 8.7% and 11.4% higher respectively than they were a year ago.
The main drivers of inflation in the UK are:
Energy bills: Wholesale gas prices have surged due to global supply disruptions since the pandemic hit in 2020, geopolitical tensions, the war in Ukraine and increased demand. The government introduced an energy price guarantee to freeze energy prices for six months, but prices still went up 27% in October 2022. The energy price guarantee has been extended.
Shortages: The pandemic and Brexit have caused labour and supply chain issues that have affected many sectors, such as food, clothing, construction and hospitality. This has led to higher costs and lower availability of some goods and services.
Demand: As the economy recovers from the lockdowns, consumer spending has picked up, especially on leisure and travel activities. This has increased the demand for some goods and services, pushing up their prices.
How do interest rates affect inflation?
Interest rates are the cost of borrowing money or the reward for saving money. The Bank of England sets the bank rate, which is the interest rate it charges to commercial banks that borrow from it. The bank rate influences other interest rates in the economy, such as mortgage rates, loan rates and savings rates.
Interest rates climbed ever higher as the Bank of England lost control of inflation
The Bank of England uses interest rates as a tool to control inflation. The Bank has a target to keep inflation at 2%, but the current rate is more than five times that. When inflation rises, the Bank increases interest rates to make borrowing more expensive and saving more attractive. This reduces the amount of money circulating in the economy and slows down rising prices.
The Bank has raised interest rates 13 times since December 2021, from 0.1% to 5.0%. This is the highest level since March 2009, when interest rates were cut to a record low of 0.5% following the global financial crisis.
What does higher inflation mean for your money?
Higher inflation means that your money loses value over time. For example, if you had £100 in April 2022 and inflation was 8.7%, you would need £108.70 in April 2023 to buy the same amount of goods and services.
Higher inflation also affects your income, spending, saving and borrowing decisions.
Income: If your income does not keep up with inflation, you will have less purchasing power and lower living standards. For example, if your salary was £30,000 in April 2022 and increased by 2% in April 2023, you would earn £30,600. But if inflation was 8.7%, you would need £32,610 to maintain your purchasing power.
Spending: Higher inflation may encourage you to spend more now rather than later, as you expect prices to rise further in the future. However, this may also reduce your savings and increase your debt.
Saving: Higher inflation reduces the real return on your savings, meaning that your savings grow slower than prices. For example, if you had £10,000 in a savings account that paid 1% interest in April 2022, you would have £10,100 in April 2023. But if inflation was 8.7%, your savings would be worth only £9,300 in real terms.
Borrowing: Higher interest rates make borrowing more expensive, meaning that you have to pay more interest on your loans and mortgages. For example, if you had a £200,000 mortgage with a 25-year term and a 2% interest rate in April 2022, your monthly payment would be £848. But if the interest rate rose to 4.5% in April 2023, your monthly payment would increase to £1,111. Mortgage interest rates hit 6% in July 2023.
How can you protect your money from inflation?
There are some steps you can take to protect your money from inflation, such as:
Review your budget: Track your income and expenses and see where you can cut costs or increase income. Try to save more and spend less, especially on non-essential items.
Shop around: Compare prices and deals for the goods and services you need or want. Look for discounts, vouchers and cashback offers. Switch providers or suppliers if you can find better value elsewhere.
Pay off debt: This is a priority! If you have high-interest debt, such as credit cards or overdrafts, try to pay it off as soon as possible. This will reduce the amount of interest you pay and free up more money for saving or investing.
Save smartly: Look for savings accounts or products that offer interest rates higher than inflation (tricky to find). Consider diversifying your savings into different types of assets, such as stocks, bonds, property or gold. These may offer higher returns than cash in the long term, but bear in mind they also carry more risk and volatility.
Invest wisely: If you have a long-term goal, such as retirement or buying a house, you may want to invest some of your money in the stock market or other assets that can grow faster than inflation. However, you should only invest what you can afford to lose and be prepared for the ups and downs of the market. You should also seek professional advice before making any investment decisions.
Conclusion
Inflation and interest rates are two important factors that affect the UK economy and your personal finances. The UK is currently experiencing high inflation due to various factors, such as energy prices, shortages and demand. The Bank of England has raised interest rates to try to bring inflation back down to its target of 2%. Higher inflation and interest rates have implications for your income, spending, saving and borrowing decisions. You can take some steps to protect your money from inflation, such as reviewing your budget, shopping around, paying off debt, saving smartly and investing wisely.
How well has the Bank of England done to keep inflation at or close to 2%?
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%…
The current interest rate in the UK is 5% as of June 2023.
This is the Bank Rate set by the Bank of England (BoE), which influences the interest rates that other banks charge borrowers and pay savers. The BoE has raised the Bank Rate 13 times in a row from 0.1% to 5% in a bid to control inflation, which is the rate at which the prices of goods and services increase over time. The BoE has a target of keeping inflation at 2%, but the current inflation rate is 8.7%, which is much higher than the target. This means that the purchasing power of money is decreasing and people have to pay more for the same things.
Summary
The Bank of England has increased the base rate to 5% – up from 4.5% in June 2023
It’s a bigger increase than most forecasters expected
The last time the base rate was 5% or higher was in 2008
Higher interest rates are intended to lower inflation, by giving mortgage-holders and consumers less to spend
The government’s target is to have inflation down to 5% by the end of the year
Rishi Sunak said: ‘I always said this would be hard – and clearly it’s got harder over the past few months’ – I am totally, 100%, on it, and it’s going to be OK‘
Seven of the nine members of the bank’s committee voted for the 5% rate – two wanted no change at all
Bank of England mission statement
Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.
Meet our new policy adviser
Well, the BoE has clearly done a good job here then with the UK interest rate now at 5%, again… and inflation at 8.7% after peaking at 11.1% in November 2022, a 41 year high! Great job!
And the UK PM said, ‘I always said this would be hard – and clearly it’s got harder over the past few months. I am totally, 100%, on it, and it’s going to be OK‘.
That’s good to know then – it’s going to be OK – so reassuring for borrowers! It’s going to be OK, so don’t worry!
Sorry PM, but that is so weak it’s bordering pathetic. Weren’t you the chancellor too?
