At least in the shops, the inflation crisis is almost over.
“There is nothing I see in the forecasts wage inflation, energy inflation or commodity price inflation, all of which suggest interest rates need to rise even further,” says Lord Wolfson, chief executive of retailer Next.
So far, he has. I'm willing to admit that «our window into the economy is small,» says Lord Wolfson: «We think inflation will come down sharply.»
The Bank of England appears to agree.
Via A few hours after Lord Wolfson's speech, the Monetary Policy Committee (MPC), chaired by Andrew Bailey, voted to keep UK interest rates unchanged.
Five of its nine members supported keeping the base rate at 5.25%. Four called for an increase to 5.5%.
Although the MPC is clearly divided, the first pause in interest rate hikes in two years has raised the possibility that borrowing costs may have peaked.
< p > “There are increasing signs that the contractionary stance of monetary policy is helping to reduce inflation,” Bailey wrote in his letter to Chancellor Jeremy Hunt. «This is good news.»
But the governor stressed that Thursday's inaction is not a declaration of victory in the fight against inflation, even if things are moving in the right direction.
“There is absolutely no room for complacency,” the governor said. — he told the chancellor.
2209 CPI and services inflation
The minutes of the MPC meeting note that “further tightening of monetary policy will be required if there are signs of more persistent inflation pressures.”
< p >The strength of the vote in favor of another rate hike—four members, including one lieutenant governor—indicates it was a very close call.
Those who supported another rate hike to 5.5% are wary that the threat of long-term rate hikes and rising prices has not gone away. They believe another rate hike is «necessary to address risks associated with deeper persistent inflation,» minutes show.
However, the argument for keeping rates unchanged ultimately won out. The key factor was inflation data earlier this week.
Inflation unexpectedly slowed last month from 6.8% to 6.7%, despite rising gasoline prices. Core inflation slowed, as did service inflation — key signals that rising price pressures are losing momentum.
Manufacturer cost cuts «appear to be reflected in consumer prices faster than previously expected,» MPC said.
These unexpected falls were enough to tip the scales.< /p>
The inflation data was the latest in a series of data showing that the economy is now beginning to feel the full impact of repeated interest rate hikes.
July's fall in GDP suggests interest rates are now hurting demand. but this is necessary to influence inflation.
2209 change in GDP
Policymakers have also relied on data beyond the official Office for National Statistics data.
The bank conducts its own research among enterprises throughout the country. MPC also received early access to the Purchasing Managers' Index (PMI), an influential business survey from S&P Global, which will be released on Friday.
The combined picture shows service companies facing less pricing pressure. , which gives additional confidence that inflation is falling.
However, hawks on the committee are concerned about wages.
The latest ONS data shows wages are rising at the fastest rate on record. since the pandemic months when furloughs skewed the data.
This has raised concerns about a wage and price spiral as companies raise prices to cover extra costs and workers increase demand in the economy by spending their extra income .
The four MPC members who voted for a different rate Rost specifically cited rising wages as an issue of concern. Strong wage growth, along with signs of robust consumer confidence, is further «evidence of more persistent inflation pressures,» they fear.
2209 Wage Growth
Bailey and his allies were ultimately able to allay those concerns. They noted that the record pay rise is «difficult to reconcile with other pay measures», including regional business surveys and HMRC pay data.
This suggests the Bank is increasingly confident that wage growth has peaked.< /p>
If they are right, when will the MPC be able to cut rates again?
Politicians downplay the likelihood of a cut borrowing costs in the near term.
“Monetary policy needs to be sufficiently contractionary for long enough to sustainably return inflation to the 2% target over the medium term,” the MPC said.
Chief economist Hugh Pill has previously used the «Table Mountain» metaphor. » when it comes to the future path of rates, suggesting a prolonged plateau at 5.25%.Financial markets seem to agree: traders believe there is a possibility of one final rate hike at the end of the year, and no a reduction of at least 12 months.
Economists, however, believe the Bank will have to cut borrowing costs before then as economic growth struggles from rates not seen in 15 years.
Berenberg Bank's Callum Pickering predicts borrowing costs will start to fall next. in the spring, with rates falling to 4% by the end of 2024.“Markets are likely to cut their bets on the bank rate path early next year as economic weakness and a further decline in inflation pressure the Bank to become less aggressive and start laying the groundwork for rate cuts, likely starting in the spring,» he says.
Paul Dales at Capital Economics doesn't think the Bank will be able to act that quickly as inflation persists.
“We expect core inflation to fall very slowly, and we think the Bank will keep rates at their peak until the end of 2024,” he says.
But once the time is right, he predicts rates will fall relatively quickly, falling to 3% by the end of 2025.
Perhaps the best way to judge when and how quickly rates will fall is to listen to UK shops. . If Lord Wolfson is right, there is hope that we are at the peak.
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