Scottish Economy

Weekly update – interest rates are raised for the 10th meeting in a row

The main economic news of the week is of course the decision by the Bank of England to raise rates for the 10th successive meeting, from 3.5% to 4.0%.

The Bank feels it needs to continue to raise rates because inflation remains well above 10% – which obviously is nothing new. More concerningly from the Bank’s perspective is that so-called “core” inflation is continuing to rise. “Core” inflation excludes food and fuel prices (which have been more exposed to external factors) and is more reflective of the domestically generated inflation which is being pushed up by the very tight labour market in the UK.

The Bank has therefore taken the view that they need to raise rates, taking more demand out of the economy, in order to reduce the risk of this inflation becoming embedded.

There was much coverage of the improvements in the Bank’s forecast between their November and February forecasts. Whilst it is good to see the outlook from the Bank improving, let’s not get too excited about their view of the economic outlook.

Whilst it is true that they have reduced the length of the expected recession from 8 to 5 quarters, most of the reason for this is that they expect slight growth in Q4 of 2022, which means they don’t expect the recession to technically start until this quarter, Q1 2023. They don’t expect it to end until the second quarter of 2024- one quarter earlier than before.

And whilst it is also true that the recession they are predicting is now much shallower, they are still forecasting that growth will contract in both 2023 and 2024, with growth in 2025 of only 0.4%. So the Bank continue to be much more pessimistic than other forecasters about growth prospects in the medium term, most notably than the Office for Budget Responsibility (OBR). The OBR will be updating their growth forecasts alongside the UK Budget on 15th March.

So where might rates go next? There are two changes since the Bank’s last decision that give us a clue. Market expectations for where rates will peak have reduced from 5.25% to 4.5%, with the peak expected In Q3 2023. If the market is correct, then rates will not continue to be ratcheted up at the same rate we have gotten used to over the last year.

The voting spread has also started to soften, with no members voting for a higher rate rise than 0.5% this time. So we are likely to see fewer and smaller rises as we move through 2023. However, this will continue to depend on the Bank’s view of the pathway for core inflation, which they are going to want to see coming down as well as headline inflation.

IMF single out the UK for contraction in 2023

At the start of the week, the IMF published their World Economic Outlook. Their latest growth forecast for the UK Economy in 2023 was -0.6%, which to be honest is more optimistic than the OBR, and around what the Bank is expecting from what was published yesterday.

However, what got the coverage was the IMF’s view of the relative performance of the UK. The UK was the only major economy that was expected to contract in 2023, even including Russia – and the UK was singled out for a downgrade compared to the IMF’s October forecast.

The reasons for the poor assessment are because of the tight monetary and fiscal environment, the exposure to high energy prices, and the issues of labour supply in the UK which is exacerbating the core inflation discussed above.

Statistics royalty school the BBC on economic reporting

The BBC released its first ever thematic review, which was to assess “whether due impartiality is being achieved across BBC taxation and public spending, government borrowing and debt output and considers if a breadth of voices and viewpoints are being reflected”.

The review was led by Michael Blastland and Andrew Dilnot, who created BBC Radio 4’ More or Less programme (for the uninitiated this makes them heroes among statisticians, and let’s face it, everyone who is cool).

The review is a great read, very accessible, and we can recommend it to those who are interested in how complex economic concepts and statistics are communicated: and when sometimes the BBC might have sometimes got it a bit wrong.  If you like our blogs, you’ll probably enjoy this!

One of the topics in the review is the way that journalists tend to communicate government debt in such a way as it is always seen as “bad” and the rather hated analogy (by this writer anyway!) of household debt for government debt.

Coming up…

Anyway, the review is fun weekend reading for you all if you’ve read all our blogs – and of course, listened to our latest podcast (focussing on our latest business survey results)!

Look out for next week’s update – where we will have the first UK GDP data for December – which will probably tell us that there has been slight growth in Q4, and therefore that the recession will indeed have to wait until Q1 2023 to start – as the Bank has assumed.

We will also be publishing our latest forecasts in our Quarterly Economic Commentary on Wednesday – so look out for that!


Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.