London Business News

Bailey’s economic porridge could be ‘just correct’

The Bank of England has increased interest rates to 0.25%, taking rates to 4.5%, this is the twelfth rate rise in a row taking the base rate to the highest it’s been since 2008.

MPC voted 7 to 2 in favour of rate rise, with the dissenters preferring to leave rates unchanged at 4.25% and inflation is still expected to drop sharply from April, ending the year at around 5%.

The market expects rates to rise slightly from here before starting to drop, however the Bank has left the door open to further rate rises if there’s “evidence of more persistent pressures.”

Nicholas Hyett, Investment Analyst, Wealth Club said, “The 0.25% increase in interest rates was widely expected, anything else would probably gain caused financial markets to drop out of bed with a bump, which is something central bankers generally try to avoid.

“However, some MPC members still thought there was a case for leaving rates unchanged, and that’s because the Bank thinks we’re looking at something close to a Goldilocks scenario – at least compared to the boiling inflation or freezing growth alternatives that are on table.

“The Bank expects inflation to trend down as considerable shocks from last year, like the higher oil prices caused by the war in Ukraine, start to drop out of the numbers.

“With inflation falling towards 5% by the finish of the year that should catch the pressure off wages, and will reduce the chance of inflation getting locked into future expectations. Food prices remain a concern, and the Bank has left the door open to further rate hikes, but the worst-case inflationary scenarios now inspect unlikely.

“The economy is also looking healthier than the Bank had previously forecast, which given it had expected a year long recession not so long ago is a relief. The economy is expected to post modest underlying growth in the first half of this year, and continue to expand into 2024.

“The challenge Andrew Bailey faces from here is keeping a perfect bowl of economic porridge at just the correct temperature. Global economic gusts, not least the growling bear of a US banking crisis, are unpredictable.”