Lesser of Two Evils is Still Evil
As widely forecast the Bank of England’s Monetary Policy Committee (MPC) kept the base rate steady today at 5.25% for the third meeting in a row, the 9 member committee voting 6 – 3 to do so.
For the first time in two years all the talk alongside the MPC’s rate decision was of the UK’s GDP growth data and not inflation – but unfortunately the lesser of two evils here is still evil in its outlook for businesses and families.
Price inflation has finally slowed markedly in the last quarter, but the strength of the medicine used to cure stubborn and persistent inflation – 21 months of interest rate rises from 0.1% to 5.25% over 21 months – does seem to have had a knock on effect in dampening economic growth.
This was forecast by some experts early in 2023 – but just as the effects of rate rises can take a while to work through and bring down inflation, so can the lag effect before they cause the economy to also shrink.
UK GDP fell 0.3% in October, and was flat at 0.0% in the three months to October – the economy stagnating as households and businesses felt the squeeze after 2 years of steep price inflation and interest rate rises.
UK interest rate swaps traders are now betting on five quarter-point interest rate cuts to 4.0% by December 2024, with the first as early as May. Experts widely expect the Bank of England to talk that possibility down today.
This is a change from even yesterday, and markets have priced in a further 0.25% reduction this morning after dovish comments from the US Federal Reserve last night in their decision to hold interest rates across the Atlantic.
With the pain in the economy showing through GDP growth data in August – October for businesses and households – some may feel as though it is a long wait until May 2024 for the medicine to fix this next ailment.
Mark Grant, Managing Director – UK, Fiducia Commercial Network.