The Hawks increase interest rates by 0.5%

The Hawks increase interest rates by 0.5%

12:29 PM, 4th August 2022, About A week ago 15

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The Bank of England Monetary Policy Committee (MPC) voted by a majority of 8 – 1 in favour of the Hawks to increase interest rates by 0.5% this month to a Base Rate of 1.75%. This is justified by a near doubling in wholesale gas prices since May, other global commodity price increases and global supply chain issues putting increased pressure on domestic prices.

The Bank of England was put under massive pressure to try and control UK inflation, but can only really affect domestic demand, not world market prices and supply issues. However, a rate rise does underpin the value of Sterling and hence offers some protection against the cost of import inflation.

The Bank is forecasting worse news than expected in the May Report with CPI inflation gaining ground from 9.4% in June to over 13% in the final quarter of 2022 and remaining high throughout 2023, before falling to the 2% target in the medium term/two years ahead.

Having increased interest rates to dampen demand and monetary stimulus, the Bank of England predicts the UK to enter into a technical recession from Q4 this year with real household post-tax spending power falling and consumption growth turning negative in the next year.

The MPC summary said: “The risks around the MPC’s projections from both external and domestic factors are exceptionally large at present.”

“The August Report contains several projections for GDP, unemployment and inflation: a baseline conditioned on the MPC’s current convention for wholesale energy prices to remain constant beyond the six-month point; an alternative projection in which energy prices follow their downward-sloping futures curves throughout the forecast period; and a scenario which explores the implications of greater persistence in domestic price setting than in the baseline. These are all conditioned on announced Government fiscal policies, including the Cost of Living Support package announced in May.

“There are significant differences between these projections in the latter half of the forecast period. However, all show very high near-term inflation, a fall in GDP over the next year and a marked decline in inflation thereafter.”



Comments

Mark Alexander - Founder of Property118 View Profile

12:38 PM, 4th August 2022, About A week ago

Is BoE blaming fuel based inflation to deflect from their own decisions to print more money? I suspect so, and that printing money is a much greater cause of the problem.

The newly printed money always has to flow somewhere and property is always high on the list. Great news for many Property118 readers but not so much if they cannot afford the associated interest rate increases.

How BoE expects increased mortgage rates to somehow help people in fuel povertyove r the long term beggars belief. So what happens next? More handouts in the form of benefits financed by more money printing? If it is, that just creates a greater dependency on a nanny state and worsens the problem, does it not?

What a mess!!!

KarenS

12:45 PM, 4th August 2022, About A week ago

They continue to use a blunt tool rather than enacting a solution that will make a real difference…..

The war in Ukraine has pushed up the cost of fuel and food, with UK inflation - the rate at which prices rise - hitting 9.4% in June, the highest level for more than 40 years.

Some firms are also having to increase wages to attract and retain staff, with job vacancies at near record highs. However, pay increases are not keeping up with the growing cost of living.

According to Larry Elliott Economics editor "Interest rate increases expected later this year will weaken a UK economy that is already expanding at its slowest pace since it began emerging from the 2021 lockdown, the latest private sector activity snapshot suggests.”

Raising interest rates to tame demand and therefore inflation is not the right solution as high prices have been mainly driven mainly by supply chain shocks, MBMG Group managing partner Paul Gambles told CNBC and I tend to agree with him. 

Black swan events have (in the main) caused the huge increase in inflation, not excessive consumer spending. Taxing the consumer further by eroding the value of the pound is the wrong approach!

Raising interest rates to bring inflation under control has also been criticised by economics experts warning it is an ineffective measure that will worsen the cost-of-living crisis that households are facing yet the the Bank of England’s Monetary Policy Committee (MPC) aren’t listening!

Happy Landlord

12:52 PM, 4th August 2022, About A week ago

I would look at the actions by the then chancellor who wants to be the next prime minister. His fiscal policy, without wishing to become too embroiled in politics, is clearly not working. You cannot change world economics but you can stop this terrible waste on green levies and the like which everyone is expected to pay for.

Mark Alexander - Founder of Property118 View Profile

12:54 PM, 4th August 2022, About A week ago

Reply to the comment left by KarenS at 04/08/2022 - 12:45
Western economic support for the proxy war against Russia hasn’t done anybody West of China and India any favours. This can be confirmed by the families of the dead on both sides and the position of the entire Western economy.

Not many people in Europe or the US realize that Russia has the strongest currency growth in the World this year. So much for the media hype about collapsing their currency within a few days of the economic sanctions!!! Very little has been reported in the West about the value of the Ruble since it started going the other way!

Mike

13:54 PM, 4th August 2022, About A week ago

I was planning on selling up and put my money in high rate interest paying account, or tie it to guaranteed bonds, at my age I am no longer able to take the stress of higher housing legislation and tenants issues, so to hell with renting, as long as my money earns me anything 2% onwards will do me nicely, So unfortunately for some its a good news for others a bad news. For me I want to see 4% base rate. before 2008 credit crunch we were getting over 4% interest on our savings. Then inflation was not as high as it is today. My properties only yield around 2% on property value as I rent at rock bottom rents, my tenants love me. Soon they will be disheartened. As an example a 2 bed flat in East London I charge £850pcm. No you cannot even get a 1 bedroom flat for under a grand a month.

Dennis Forrest View Profile

18:26 PM, 4th August 2022, About A week ago

I can never understand how putting up interest rates curbs inflation especially when caused mainly by external factors. However I think the BOE will continue with this policy as they can't think of anything else and I expect to see rates of 6 or 7% by the end of the year. Their thinking will be 'We have not put interest rates up enough and that's why it's not working'

TrevL

19:47 PM, 4th August 2022, About A week ago

Reply to the comment left by Dennis Forrest at 04/08/2022 - 18:26
Raising interest rates strengthens the pound against other currencies. Since I believe the UK is both a net importer of energy and food, a stronger pound reduces these key import costs.

So when people say raising interest rates won't help the poor, thats wrong, it will, by making the pound in their pocket go further on their key purchases. The side effect is that it will hurt those with debts, but thats not actually the primary aim.

Either way, since both our biggest economic neighbours are now raising rates (EU 0.5%, US 0.75%), the BOE will have to follow otherwise the lights will go out and we'll all be eating our pets (sorry, a little over-dramatic).

Dennis Forrest View Profile

20:34 PM, 4th August 2022, About A week ago

Reply to the comment left by TrevL at 04/08/2022 - 19:47Only a small proportion of the population have significant savings and these people, including myself, will benefit from higher interest rates. The average debt in the UK as of March 2022 per person was around £33,000 and this includes mortgages, credit cards and other loans. This will affect all housing costs as landlords also will try to recoup higher interest costs on their BTL mortgages. I disagree about making imports cheaper. imports will go down anyway. People are not stupid as food costs go up they will change their buying habits and for example they will no longer want to buy imported strawberries in January. They probably will give kiwi fruits a miss as well. They also might buy more potatoes which have fallen in price rather than pasta which has gone up considerably. On a lighter note does that mean that people with goldfish as pets are going to starve?

TrevL

20:50 PM, 4th August 2022, About A week ago

Reply to the comment left by Dennis Forrest at 04/08/2022 - 20:34
Depends how many goldfish you have, they probably taste like COD!

Either way, I reakon another 0.5% from BOE 15/09 and another 0.75% from fed 21/09. The BOE won't be able to follow the FED this time, reakon Bailey will be on the phone to Powell to see what he's gonna do?

Mark Alexander - Founder of Property118 View Profile

21:29 PM, 4th August 2022, About A week ago

Reply to the comment left by TrevL at 04/08/2022 - 19:47
Increased interest rates has not affected the value of the pound against any other major currency today.

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