Last week the Federal Reserve in the USA increased interest rates by 0.25% pa from a range of 4.75% to 5.0% pa to a range 5.0% to 5.25% pa. This is its highest rate in 16 years. In addition, the European Central Bank (ECB) increased interest rates again by 0.25% to 3.25% pa effective from yesterday (10 May 2023). The Federal Reserve also hinted that this rate increase could be the last one in the current cycle to let this filter down in the economy through the summer and combined with food and energy price increases slowing down, to hopefully steer the US economy back to its 2% pa inflation target.
Perhaps to demonstrate the success of the USA’s managing down inflation with interest rate increase, CPI in the USA was yesterday confirmed to have fallen to 4.9% in April, down from 5.0% pa in March and 6.0% pa in February.
Current UK inflation figures for March (published on 19th April) reported CPI at a stubborn 10.1% pa and April’s inflation rate is not due for publication until 25th May 2023. This means that Bank of England has today set rates based upon a March 2023 inflation report and assumptions for what April’s inflation figures will be when published in two weeks.
Today at 12 noon, the Bank of England confirmed that interest rates will increase by 0.25% pa from 4.25% pa to 4.5% pa. This is the highest rate we have seen since 2008 (15 years). Two of the nine Monetary Policy Committee members voted to keep rates at 4.25% but the rest voted for 4.5% pa. They suggest that within 2 years, they expect interest rates to be back down to around 3.5% pa.
We believe this is yet again, too little, too late. But we understand the Bank of England is trying to balance getting inflation down without pushing the country into recession or creating significant problems in the property market with negative equity if prices fall and house repossessions if people cannot afford to meet mortgage payments. So we believe, they are hoping for food and energy prices to fall as this interest rate increase filters into the economy over the summer.