Has the Bank of England done enough to stave off recession?

The Bank of England has held interest rates at their 15-year high for a second time. Markets were expecting another pause, but there was no guarantee: once again the Monetary Policy Committee (MPC) was split on the decision, voting 6 – 3 to hold rates at 5.25 per cent. The minority on the committee were in favour of increasing rates by 0.25 percentage points. 

The Bank’s governor warned these votes would be ‘tight’ and hard to predict for the foreseeable future. But some are taking this second pause as a sign that rates have peaked. Capital Economics says it is ‘all-but confirmed’ now, while also noting that the ‘Bank is keeping the door open to the possibility of further rate hikes’. There is growing market consensus that rates have reached, or nearly reached their peak, as indicated in The Spectator’s data hub graph below.

The Bank knows it is walking a fine line at the moment between tackling inflation but also keeping the UK on the right side of a recession. The British economy has defied the doomsday predictions this year, growing marginally in Q1 and Q2 this year (by 0.3 per cent and 0.2 per cent respectively).

But these are not growth figures to boast about – and economic circumstances could get worse. Today’s Monetary Policy Report downgrades the Bank’s forecasts for economic growth, which Threadneedle Street now expects will be ‘flat’ in Q3 this year and grow by only 0.1 per cent in Q4. 

Stagnant growth is one of the many consequences of higher interest rates, which are implemented with the intention of taking heat out of the economy. Despite the inflation rate sticking at 6.7 per cent on the year in September, the Bank remains optimistic that inflation will continue to slow, dropping to under 5 per cent in Q4 this year. This would keep the Prime Minister on track (just) to meet his pledge to ‘halve inflation’.

But the MPC suggests it’s more than a year away from returning to its inflation target of 2 per cent. Added to this, where the rate is expected to fall by the end of this year is still well above Eurozone average, reported on Tuesday at 2.9 per cent on the year in October.

While the Bank reports ‘upside risks to inflation from energy prices given events in the Middle East’, it also notes that ‘there has been little news in key indicators of UK inflation persistence’. So the majority of the MPC decided to keep rates on hold. But the BoE is clear that rate cuts are off the cards for a while, as it insists it is ‘likely to need to be restrictive for an extended period of time’. 

This is going to prove tricky for the government, which has also promised to spur on economic growth. It’s thought that the bulk of the BoE’s fourteen consecutive rate rises still haven’t been fully felt. When they are (particularly through higher mortgage payments), economic growth is likely to suffer further. Given no growth is already being predicted by the BoE for next year, even a minor downgrade could mean recession.