Today, the Bank of England is expected to raise interest rates to 1.25 percent, during the fifth consecutive meeting of the Monetary Policy Committee. It is looking to rein in high inflation on the back of slowing growth and a weaker pound.
The last time interest rates were breached by 1%, it was in 2009 when Gordon Brown was British Prime Minister, and the world was still facing the tailwinds of the “financial crisis”, as central banks pumped trillions of dollars through quantitative easing to support the global economy .
The latest data released two days ago showed that the British economy unexpectedly contracted last April on a monthly basis by 0.3 percent, after a contraction of 0.1 percent in March. This is the first consecutive decline since April and March 2020.
At its meeting in May, the British Central Bank raised the key interest rate by 25 basis points to 1 percent, its highest level in 13 years. But it warned that the British economy was in danger of sliding into a recession.
Since then, data has shown that inflation in Britain rose to a 40-year high of 9 percent annually in April as food and energy prices soared. The bank expects inflation to rise above 10 percent later this year.
The purchasing power of households in the United Kingdom also experienced its largest decline in at least 21 years.
The average year-over-year decline in wages during the three months to the end of April was 2.2 percent, the largest decline since 2011. Wages rose 4.1 percent in April, about half the rate of inflation. Wages, including bonuses, have increased at a faster pace, but bonuses are uneven.
The employment rate during the same period increased by 0.2 percentage points to 75.6 percent, but it is still lower than pre-Corona pandemic levels. The number of vacancies rose during the three months until last May, to a new record, reaching one million and 300 thousand jobs.
But monthly unemployment estimates may be cause for concern, as they jumped to 4.2 percent in April.
The OECD expects the worst for Britain
The Organization for Economic Co-operation and Development has forecast that Britain will be the weakest economy in the Group of Seven next year, as high interest rates, tax increases, declining trade and skyrocketing food and energy costs affect households.
The organization also expected the British economy to grow by 3.6 percent this year before a recession in 2023.
The British pound has fallen more than 10 percent against the dollar since the beginning of the year, and it was trading just above $1.20 on Wednesday.
Finance Minister Rishi Sunak announced a package of measures late last month aimed at alleviating cost of living crisis for families. This included an unexpected tax on major oil and gas companies which the government has long opposed in the past.
What to expect from today’s meeting?
According to the expectations of major banks, such as “Deutsche Bank”, “Namura”, “Societe Generale”, and “Noreda Bank”, the Bank of England will raise interest rates for the fifth time in a row, and the increase will be about 25 basis points only, in light of the continuing inflationary pressures within Britain.