Weekly update – 14th time the charm for the Bank of England?

Yesterday, the Bank of England raised interest rates for the 14^th time in a row, taking them to a 15-year high of 5.25%.

The Governor of the Bank of England made it clear that the Bank was aware that this was starting to cause real pain in the economy, but that their responsibility is to try to bring down inflation.

The latest inflation data for June does show a fall, and food price inflation finally seems to have peaked. However, the very tight labour market continues to drive services inflation, which the Bank are particularly worried about becoming embedded in the economy.

Despite this concern, it does seem like the Bank is softening a little – going for the more modest (compared to June) 0.25% rise in rates. Markets seem to be expecting that there will be two more rate rises in the final few months of this year, perhaps getting up to 5.75 or 6%. More worryingly for those with mortgages (and, as a knock-on, for those who are renting), the expectations are that these high rates are likely to persist for some time.

Currently, the Bank expect that consumer price inflation will fall to 4.9% in the final quarter of 2023. This is good news for Rishi Sunak, as – if this is correct, of course – this would mean he would meet his pledge to half inflation by the end of the year. However, inflation is not expected to fall below the 2% target until mid-2025.

Remember, though, that even if inflation falls to this sort of level by the end of the year, this does not mean that prices will start to fall – just that they will be rising less quickly.

The Bank’s economic forecasts were definitely fairly sobering. They are currently forecasting growth of 0.5% in 2023, 0.4% in 2024 and 0.3% in 2025. When the best thing you can say about these sort of anaemic growth forecasts is that at least they are no longer forecasting the longest recession in history – as they were in late 2022 – you know we are in a bit of trouble.

Uprating update

We published our initial reaction to the new Fiscal Framework, following the review of the arrangements between the UK and Scottish Governments.

We said in the blog that the details of the plans to uprate many of the borrowing limits in the Fiscal Framework by inflation weren’t yet available – but in fact, these details were in the document.

The idea will be to uprate these by the GDP Deflator. This measures inflation across the whole economy, not just that experienced by consumers (as is the case for CPI). It is the measure of inflation that is generally used to put Government spending into real terms.

Essentially, the limits will remain constant in 2023-24 prices, using the latest set of deflators published by the OBR. The table below sets out how this would affect the limits in question, using the set of deflators produced at the Spring Budget both in terms of annual limits and overall caps.

£m	2023-24	2024-25	2025-26	2026-27	2027-28
Resource Borrowing Limit	600	609	615	623	633
Capital Borrowing Limit	450	457	461	467	475
Scotland Reserve Cap	700	711	718	726	738
Resource Borrowing Cap	1,750	1,777	1,795	1,816	1,846
Capital Borrowing Cap	3,000	3,047	3,076	3,113	3,165

Enjoy the weekend everyone!