Hunt's vow to halve inflation at risk as bank predicts headline rate will remain higher for longer
The Bank has hiked interest rates again, although in truth no one should be surprised.
The markets believed a 0.25% increase was nailed on from the moment the headline annual rate of inflation came in at a blistering 10.1% in March. The Bank of England had 9.2% pencilled in.
The pace at which prices are rising is cooling but not as fast as the Bank had hoped and so the cost of borrowing money has been increased for the twelfth consecutive time since December 2021.
The encouraging news here is the Bank is slightly more upbeat about the prospects for economic growth.
Its previous forecast of a recession has been ditched, largely because the market price of energy has continued to fall. The market price of gas stands at 150p/therm today, last autumn it was 400p.
The chancellor’s Budget, complete with extra financial support for households and capital allowances for business, is also judged to be lifting growth.
But we shouldn’t get carried away here. The outlook is still weak, it’s just not as dire as it was in February.
The sting in the tail is inflation, which the Bank of England now thinks will remain higher for longer.
The Bank forecasts it will only hit its 2% target at the beginning of 2025 - a year later than it thought just three months ago.
The headline annual rate is now expected to still be at 5.1% by the end of this year.
The government’s pledge to “halve inflation” by the end of 2023 was made in January when the headline rate stood at 10.1%. At the time it felt like the safest of bets, now even the chancellor - speaking at the G7 meeting of finance ministers in Japan - appears to concede there’s a risk it won’t be met.
“The Bank of England predicted that we will hit the inflation target,” Mr Hunt told reporters. “But there's never been anything automatic about hitting it. That's why it's so important to bring certainty back to family finances, to stop prices rising and that we stick to our plan to halve it.”
"We want to bring certainty back to family finances," the Chancellor says from Tokyo
Inflation suddenly looks like it might prove more of a problem than we thought.
The Bank’s minutes refer to ”upside risks” - the door has been left open to at least one further interest rate rise.
The Bank has consistently viewed the wave of inflation which has hit the UK - triggered first by the pandemic and intensified by Russia’s invasion of Ukraine - as “external” and “temporary”.
But as the impact of sky-high energy and food prices begins to subside, the Bank worries inflation is now being generated domestically.
Higher interest rates are intended to subdue demand - not least for labour - and douse down what the Bank calls “second round effects,” which is economist-speak for an upward spiral of wages and prices.
The Bank sees evidence that households and businesses, not unreasonably, are doing what they can to protect their incomes in the face of high inflation. Workers want higher pay, firms are raising prices.
Last month the Bank’s chief economist, Huw Pill, likened what is happening to a game of “pass the parcel” - a game that he said was generating inflation.
How much of the “above target” inflation does the Bank think is down to household and businesses trying to protect their spending power? The Bank doesn’t say.
Pills’ “we have to accept we are poorer” comments caused widespread outrage. Today, the Bank is being more careful in the way it expresses itself.
Bank Rate now sits at 4.25% and the markets are betting its will be on its way to 5% before the economy is purged of inflation.
There are good reasons to be optimistic that inflation can be brought to heal, not least the fact that the full force of the interest rates rises to-date has yet to be felt. As the Bank points out, 1.3 million households have yet to roll off their fixed-rate mortgage deals this year.
But in an economy where there are almost as many job-seekers as there are vacancies, the Bank believes the danger is prices and pay feed each other and inflation get stuck on the way down.
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