Economy
Bank of England Halts Interest Rate Hikes Amid Cooling Economy
The Bank of England (BoE) kept the base rate on hold today, marking a pause after 14 consecutive interest rate rises. The decision was influenced by lower-than-expected inflation numbers and a series of economic reports suggesting a cooling down of the economy. However, it remains uncertain whether the current 5.25% will be the peak for the base rate or if rates could start to climb again.
The BoE’s decision to halt the rate increases has significant implications for savings rates and mortgage rates, which were discussed by Georgie Frost, Lee Boyce and Simon Lambert today. The trio explored why interest rates were held, what factors contributed to the dip in inflation, potential future scenarios, and what these developments mean for savers, borrowers, and investors.
The BoE’s decision follows strong criticism for its failure to predict the surge in inflation that peaked at 11% in autumn 2022. In response to this criticism, the bank has commissioned former Federal Reserve chairman Ben Bernanke to review its forecasting models for both inflation and GDP growth.
An independent analysis comparing the BoE’s performance with other forecasting models highlighted two key errors. First, the bank under-predicted inflation in 2021 compared to an international econometric vector autoregressive model. Second, it over-predicted peak inflation in the final quarter of 2022, expecting 13.1% when it came in at 10.8%. These miscalculations led to larger-than-usual interest rate hikes and potentially increased the likelihood of a UK recession in the coming months.
The BoE’s forecasts have been accurate over a 15-year period but have faltered significantly over the past two years when inflation has been high. The bank’s forecasts have been particularly inaccurate following the initiation of quantitative easing (QE) in 2009, raising questions about its understanding of the policy’s impact.
The latest inflation data, published on September 20, indicates a 6.8% inflation rate for the third quarter of 2023. Both the BoE’s forecasts and the international econometric vector autoregressive model predict this fairly accurately, while other models over-predict.
In light of these findings, suggestions have been made for the BoE to be more transparent about its inflation model and to consider hosting a “prediction tournament” to measure its model’s effectiveness against rivals. This open-sourcing of forecasting harks back to an annual conference run by Professor Kenneth Wallis of the University of Warwick in the 1980s and 1990s, which assessed various institutions’ economic forecasting models. The revival of such a conference could be a part of Ben Bernanke’s review of the BoE’s forecasting.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo
SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.
With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.
The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.
China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.
The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.
“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.
The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.
($1 = 7.1315 renminbi)
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
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