High Interest Rates are here to Stay

High Interest Rates are here to Stay
Written by Clara Brown
person Clara Brown
event_note 18th October 2023
folder_open Economic News

“High Interest Rates are here to Stay”

With continued high levels of inflation, The Bank of England Deputy Governor Ben Broadbent said UK rates may have to rise further. Similar trends can be seen in other markets where the Federal Reserve Chair Jerome Powell said the US central bank is “prepared to raise rates further if appropriate,” while the European Central Bank President Christine Lagarde vowed to get borrowing costs as high as needed and leave them there until inflation is back to its goal. Following the comments, two-year Treasury yields — the most sensitive to policy expectations — hit the highest level in seven weeks.

With this in mind, The Bank of England is expected to raise interest rates in September for the 15th consecutive time since December 2021. The minimum wage has passed the high inflation test. Consumer confidence is an indicator of willingness and ability to spend, which matters for economic growth as household spending accounts for a large part of gross domestic output. It has been undermined by soaring food and energy prices, which surged to multi-decade highs following Russia’s invasion of Ukraine.

Despite this, UK consumer confidence rose more than expected in August, helped by lower energy prices and accelerating wage growth. The consumer confidence index rose five points to minus 25, recovering most of the ground lost in July and returning to about the levels seen at the start of last year.

Many economists have attributed the improvement to an easing of the cost-of-living crisis. In July inflation dropped to 6.8 per cent, the lowest rate since February last year and down from a peak of 11.1 per cent in October.  Wages increased at the fastest pace on record in the three months to June, rising more quickly than prices for the first time in about a year sand a half. These figures suggest that the cost-of-living crisis is coming to an end

Lastly, pound has waned in value against the Euro and Dollar as the market reduced bets for future BoE rate hikes following July’s surprising below-consensus inflation release which suggested the UK’s inflationary problem is finally easing. 

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