Bank of England to look through weaker growth and send rates to financial crisis levels
The Bank of England will look through weaker than expected economic growth this year and send interest rates to levels not seen since the financial crisis, experts are betting.
Zeroing in on eradicating rampant inflation in the UK at the expense of providing a floor for the economy will drive the Bank to launch the quickest rate hike cycle in recent memory, according to Wall Street giant Goldman Sachs.
The worst reduction in Brits’ living standards since 1990 as a result of inflation topping seven per cent, a national insurance hike and a 54 per cent uplift to the energy bill cap will slow consumer spending, resulting in the UK economy growing much slower than first thought in 2022.
GDP growth will come in 1.1 percentage points lower than thought this year at 3.7 per cent “due to the size of this year’s real income drag,” analysts at JP Morgan said.
A similar rationale led Goldman to downgrade their output growth forecasts.
The Bank will, however, ignore depressed economic growth and lift rates to 1.75 per cent by November, sending them to the highest level since 2008, Goldman said.
Conviction among City experts that the Bank will press on with its sharp policy pivot to tame inflation is leading them to bake in higher borrowing costs.
Governor Andrew Bailey and co have completed the first stages of the tightening cycle having already hiked rates at back-to-back meetings for the first time since 2004.
Fresh inflation estimates released by the Office for National Statistics (ONS) today are expected to coax the Bank into ploughing ahead with consecutive rate hikes at each of its meetings until the summer.
City economists think the cost of living will climb to 5.5 per cent, up from a near 30-year high in December.
Meanwhile, figures published yesterday by the ONS illustrated pressure is continuing to build in the jobs market.
Vacancies are running at a record high, while health implications among older workers is leading to them dropping out of the labour market altogether, reducing the supply of workers.
A scarcity of candidates is driving firms to hike pay to attract and retain new and existing recruits, putting upward pressure on wages.
The Bank has repeatedly warned worsening pay pressures could result in inflation becoming embedded in the UK economy over the long term.
Strong “wage growth” and “a high stock of savings” will give Brits a “buffer” against the cost of living squeeze, meaning households can maintain normal spending levels, Goldman added.
However, poorer households will suffer the worst hardship over the coming months, mainly due to their budgets absorbing a harsher blow from higher energy bills. These households have “little to no savings to help buffer any shortfalls,” Goldman said.