We knew the type of inflation we were dealing with was stubborn, but today gives us an idea of how much so so. We’re talking a three-year-old who is refusing to eat their spinach levels of stubborn. And as any parent knows, once you’re in this position, you are in trouble.
Keeping with this analogy, the Bank of England is the exasperated, somewhat powerless parent. Looking at the data published alongside its decision to keep the base rate at 5.25 per cent, it shows that even were it to decrease the base rate possibly even several times, it would not significantly change the dial on inflation next year.
The figures on the economy were quite a bit gloomier than expected, and we’re now now due to hit the 2 per cent target until the end of 2025, six months later than forecast only in August. Were the base rate to stay where it is, the country goes into recession next year and stays there for 12 months. If the Bank reduces the base rate, growth flat lines: the table outlining this scenario is a depressing sea of zeros. I for one am not going to be rushing out to book a holiday in the Caribbean any time soon given that a flatlining economy is the more positive of the two outcomes we’re looking at.
The monetary policy committee (the rate setting committee within the Bank, often known as the MPC) noted that a “restrictive policy stance” – code for higher rates – is “likely to be warranted for an extended period of time”. The MPC added that “a further rise in bank rate remained a possibility”.
So what does all of this mean for our wallets? Next year will be tough: rates will stay high, unemployment is likely to go up, the pay increases many have been able to obtain will become harder to come by. The Bank estimates that half of the impact of increasing rates is yet to feed through in the economy, which means many of us haven’t remortgaged yet so are living on old money that hasn’t been strangled by the rate rises.
My take home message from today is to make sure you are doing all the boring, sensible things. When interest rates were low, any fool was able to make money from the stock market and feel like Warren Buffet.
Now you don’t need to risk your money to make a decent return; standard savings accounts are beating yields of many investment funds and this is likely to continue.
That we are in an unprecedented situation is underlined by the fact that we are seeing house prices going down, rising unemployment, very gloomy news on GDP and falling inflation…. and the Bank is still not opting to cut rates.
Save as much as you can – one of the worst consequences of the 15 years of rock bottom rates is that we were deprived of any incentive to save, which is the best insurance policy I know of to allow you to sleep at night even when the economy weakens.
We are in a new world. Higher interest rates mean smaller mortgages and more expensive borrowing everywhere, and a reassessment of the risks we take with our money.
Sometimes boring is best – adults as well as kids will need to eat their spinach. Looking at the tables compiled by the economy wonks at the Bank of England, that is especially true now.
