The Bank of England (BoE) and its governor, Andrew Bailey, embarked on a dangerous descent with their reputation and prestige at stake. Its strategy since the pandemic of gradually and gently increasing the price of money – up to thirteen consecutive increases – has failed to halt UK inflation that continues to soar. This Thursday, the BoE’s Monetary Policy Committee surprised markets by an aggressive 0.5 percentage point hike in the interest rate to 5% by a seven vote in favor and two against. The week started with May inflation data remaining at 8.7%, three-tenths higher than analysts’ forecasts. Worse still, core inflation, which excludes energy, unprocessed food, alcohol and tobacco prices, rose to 6.5% in May from 6.2% in April, the highest rise in 30 years.
“The Monetary Policy Committee [del BoE] It will continue to monitor closely any signs of persistent inflationary pressures across the economy, including tensions in the labor market and developments in wage increases and service cost inflation. “If signs of sustained pressure emerge, further tightening of monetary policy will be necessary,” the UK Monetary Authority said in its statement.
There were already many analysts – albeit not the majority – calling for the BoE to move more than the expected quarter-point rise, so the surprise effect of the move on markets was short-lived. Governor Bailey had recognized in a parliamentary appearance that the currency unit he heads had made a mistake in the model used to forecast inflation developments.
Although neither the government nor the BoE want to say it clearly yet, Brexit has limited the UK’s ability, both in terms of production and competitiveness, to fight inflation, which could become chronic, while the US or the EU already do the case is subside.
“Inflation erodes citizens’ savings and raises prices, ultimately making us all poorer,” Prime Minister Rishi Sunak said during the scrutiny session in the lower house on Wednesday. “That’s why I said at the time that while it’s not easy to tackle, we will make responsible and difficult decisions,” he said. At the beginning of his term, Sunak pledged to halve inflation by the end of this year. The consensus of experts is that delivering on that promise will prove next to impossible. The pressure on Brits’ pockets is making the Conservative government’s prospects for an election recovery extremely difficult.
The “Mortgage Penalty”
Most UK financial institutions have revised up the terms of their mortgages and UK homeowners are facing an annual increase in their payments of almost £3,400. “The Mortgage Punishment of the Conservatives”. This is what the union opposition has dubbed the situation, which has no qualms about cornering the prime minister with an economy far worse off than his European neighbors.
The government seems to support the path taken by the BoE at the moment. Chancellor of the Exchequer Jeremy Hunt has written a letter to Bailey expressing his support for the strategy: “Businesses and households need to be able to trust that the government and the BoE understand the challenges they face from rising prices and none “Have doubts that we will act together to keep inflation under control,” Hunt said.
The pound sterling reacted to the central monetary authority’s decision by bouncing sharply for the first few minutes, but then immediately began falling. Something similar happened with government bonds. Markets are expecting interest rates to rise again in August and anticipate that the year will end with interest rates on money at 6%. The idea of a recession in the face of such restrictive monetary policy once again overwhelms analysts looking at the UK.
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