Interest rates should be held steady again next month rather than being cut for the first time in over four years, according to Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee (MPC). Haskel emphasized the importance of maintaining rates at 5.25% until there is more certainty that inflation pressures have sustainably subsided.
Current Economic Context
Inflation and Interest Rates
Interest rates have been kept at a 16-year high in an effort to slow rising consumer prices. However, these higher rates have also increased the cost of borrowing, including for mortgages. Previously, the Bank of England hinted at a possible rate cut in August after official figures showed inflation slowing to 2%, aligning with its target. This hint led some lenders to slightly reduce their mortgage rates.
Financial Market Expectations
Financial markets have priced in a roughly 60% chance that rates will be cut next month for the first time since 2020. Despite this, Haskel, who voted to hold rates in June, believes that the MPC should remain cautious due to ongoing concerns over the UK’s job market and worker shortages.
Arguments for Holding Rates
Inflation and the Labour Market
While there are “considerable encouraging signs” of falling inflation, Haskel expressed concerns that the rate would remain above 2% “for quite some time.” He highlighted the tight and “impaired” labour market as a significant factor, suggesting that it continues to pose risks to the economy.
Mortgage Rates and Lenders
Some mortgage lenders are factoring in a potential drop in the benchmark rate when setting the interest rates for new fixed deals. They aim to stay competitive while managing application volumes. Recently, Nationwide and Virgin have reduced rates, following other lenders. The average two-year fixed mortgage deal is now at 5.93%, while a five-year deal stands at 5.51%, according to Moneyfacts. The average easy access savings rate is 3.11%.
Economic Impact of High Borrowing Costs
Household Budgets and Economic Growth
Higher borrowing costs have added financial pressures on household budgets, already stretched by increased energy and food bills. The Bank of England, independent of the government, aims to keep inflation stable at 2%. In response to high inflation, the Bank has raised and maintained high interest rates, which could slightly increase inflation in the coming months.
Labour Market Dynamics
The theory behind rising rates is to slow inflation, but it can also hinder economic growth as businesses may delay investment or hiring, potentially reducing job creation. The UK has a lower percentage of working-age individuals employed compared to pre-Covid levels. Worker shortages can impact inflation by forcing employers to raise wages to attract and retain staff, which may lead to higher goods prices as businesses adjust to cover increased costs.
Conclusion and Future Outlook
Jonathan Haskel, an external member of the MPC and professor of economics at Imperial College Business School, suggests holding rates until inflationary pressures are confirmed to have subsided sustainably. His term on the MPC is due to end on 31 August. The Bank of England’s approach to interest rates and inflation management will continue to play a crucial role in shaping the UK’s economic landscape.
FAQ
Why does Jonathan Haskel recommend holding interest rates?
Haskel recommends holding interest rates to ensure inflationary pressures have sustainably subsided and due to concerns over the tight and impaired labour market.
What are the current interest and mortgage rates?
The current Bank of England interest rate is 5.25%. The average two-year fixed mortgage rate is 5.93%, while the five-year fixed rate is 5.51%.
What factors are influencing the decision on interest rates?
Key factors include inflation trends, the labour market condition, borrowing costs, and overall economic growth.
How does the Bank of England’s interest rate impact the economy?
Higher interest rates aim to slow inflation but can also slow economic growth by making borrowing more expensive, potentially reducing business investment and job creation.
What is the Bank of England’s primary role?
The Bank of England’s main role is to keep inflation stable at 2%. It uses interest rate adjustments to manage inflation and influence economic activity.
