It became clear this week that however much the Bank of England has been softening its view on rate rises ahead, stressing a broad desire not to crush the economy, it still has a job on its hands to get inflation down.
The debate now – here and elsewhere – is focused on what should tightening from this point look like. The beast has been caged but not calmed and central banks everywhere are weighing up the merits of pausing rate hikes but keeping them higher for longer, against pushing rates higher now to try to secure complete control. It’s a choice between smooth and drawn out, and sharp and short. The expectation is that the Federal Reserve will pause rather than hike next week, while the Bank of England looks likely to raise its base rate to 5.5 per cent on 21 September.
The rate of price rises in the UK for the month of August will also be announced next week, and it’s likely to show an upturn in inflation from 6.8 per cent, rather than another fall, echoing the similar small jump in the US headline rate from 3.2 to 3.7 per cent, and with the same driver of rising fuel costs behind it. But rather than strengthening the case for a further 25 basis point hike this month or in the future – the monetary policy committee (MPC) may be comfortable dismissing the rise as a blip. Both the Bank’s governor, Andrew Bailey, and chief economist Huw Pill have been keen to underline that we are close to the end of the hiking cycle, that inflation is firmly on the way down and that policy is already in restrictive territory.
Statistics from the Office for National Statistics (ONS) revealed this week that wages have been growing at a rate of 7.8 per cent in the three months to July, and by 8.5 per cent when bonuses are included. So real pay is no longer taking a hit from inflation and that level of growth is not going to reassure the MPC its job is close to done. In the US wage growth has been falling.
But besides wage growth, the Bank watches employment numbers closely because rising unemployment will ease pressure on earnings. And unemployment did rise in the period, creeping up from 4.2 to 4.3 per cent. There were fewer job vacancies, too, as employers become increasingly reluctant to hire until the picture ahead clears.
Concerns may be further dispelled by the Bank’s August survey of its Decision Maker Panel, which revealed that businesses expect output price inflation to fall over the next year to just under 5 per cent, a downward revision from 5.2 per cent previously, while expectations for consumer price index inflation for the year ahead decreased to 4.8 per cent in August, down from 5.4 per cent in July. The decision-makers also expect year-ahead wage growth to be 5 per cent.
Another factor that might sway the decision is the 0.5 per cent decline in gross domestic product (GDP) output in July, after a rise in June. But here too the pieces of the puzzle are not yet forming a clear picture – Pantheon Macro doubts that this month-to-month drop marks the start of a falling trend “given that it can be uncontroversially attributed to one-off developments”, identified by the ONS as strikes and bad weather.
Meanwhile, pay catching up with inflation and healthy-looking savings accounts could mean consumer spending proves resilient. The Resolution Foundation points out that total interest on bank accounts, cash individual savings accounts (Isas) and other savings will reach £90bn in 2024-25 – or over £3,000 per household – up from just £5bn in 2021-22. In contrast, around half of the mortgage cost rise is still to come, although around 90 per cent will have fed through by the fourth quarter of 2024.
But Capital Economics, while acknowledging that almost twice as many working days were lost to strikes in July than in June, warns the reversal in GDP growth could mean a mild recession has begun. It thinks the Bank will pull the policy trigger once more at the next meeting, then pause in November but keep rates at 5.5 per cent for the next 12 months.
