The Bank of England is currently in a no-win situation where it’s forced to decide between sky-high inflation and shrinking economic activity.
That’s the take of Walid Koudmani, chief market analyst at financial brokerage, XTB, who was one of the many professionals to respond to the Bank’s 0.5% rate rise.
The Bank has predicted a shrinking of the UK economy in the final quarter of the year as well as a recession for the whole of 2023 – a gloomier take on the year ahead.
Koudmani said: “The Bank of England is stuck in between a rock and a hard place. On the one hand, inflation is now expected to peak at 13%. This is far higher than recent projections and would normally force them to act faster to hike interest rates to curtail this cost pressure.
“Yet on the other hand, they expect UK economic activity to shrink and continue to do so for around the same time as the previous financial crisis. In that sense, they simply cannot move too far on rates or they will lock in a much deeper recession.
“A suspicious person might think ‘Are they trying to talk down inflation by warning about economic activity?’ Time will tell. The market does however continue to think the Bank of England moved too slowly on interest rates initially and now they are unable to chase their tail either due to the drop in UK economic activity. This doesn’t spell good news for the UK pound.”
A backer of Liz Truss has attacked the Bank of England for being too slow in responding to rising inflation.
Suella Braverman, a Truss ally tipped as a future home secretary, told Sky News: “Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”
Following this latest increase mortgage holders should be braced for higher rates going forward, though those with savings could finally generate some stronger returns after more than a decade of the base rate being at a negligible level.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “It’s a global phenomenon with the BoE following the Fed and ECB in going above and beyond 0.25bp increases as inflation proves incredibly stubborn.
“Recession predictions pile on the pressure even further with the potential for job losses causing further concern for people already struggling to pay their bills.
“The interest rate increase has big impacts for our finances. Mortgage holders who are yet to fix their rates as well as those trying to repay other debt who will see their repayments climb. However, savers and people coming up to retirement may be able to find some slightly more positive news among the gloom.”