LONDON — U.K. Finance Minister Jeremy Hunt signaled the nation’s inflation remains too high, a day after the Bank of England agreed its 12th consecutive interest rate hike in a bid to combat stubbornly high household prices.
“I think we are aware there is still a long way to go. We still have inflation that is too high, growth is still not as high as we would like it to be,” he told CNBC’s Martin Soong on Friday, hours after the latest official data showed the UK economy eked out 0.1% growth in the first quarter.
“I think the U.K. is back and those are numbers that no one would have predicted even three months ago. These are much higher growth projections,” he noted of the first-quarter print, nevertheless flagging ongoing concerns over labor supply, productivity rates and how to increase long-term growth.
He defended that U.K. economic performance has been impacted by macro-economic concerns, citing a “once-in-a-century pandemic and an energy price shock that is probably the biggest since the 1970s.”
The Covid-19 pandemic has led to severe global logistical and production bottlenecks, while sanctions following Russia’s full-scale invasion of Ukraine in February last year have deprived Western consumers of Moscow’s fuel supplies.
Hunt stressed his support of the Bank of England’s Thursday decision to increase interest rates by a further 25 basis points despite the latest GDP results, arguing the measure will counter the “fundamental instability” triggered by high inflation.
The successive spring collapse of several international banks, including Europe’s Credit Suisse, had brought into question whether central banks would begin to ease their policies of rapidly raising interest rates.
“I think we all believe, certainly we in the U.K. believe, that the most important thing we need to do is focus on getting inflation down,” Hunt underlined. “Once inflation is down and you have stability, you can start to get growth up.”
As of Thursday, the Bank of England’s Monetary Policy Committee nevertheless no longer expects the U.K. to enter a recession this year, with Governor Andrew Bailey defending that its “biggest upgrade” ever to forecasts reflected a volatile economic landscape.
The central bank’s prognosis marks an optimistic upgrade from the picture painted by the International Monetary Fund, which in late January predicted the U.K. will be the only “advanced economy” to shrink in 2023, with an economic outlook worse than that of sanctions-struck Russia.
“I think lots of people were expecting the U.K. economy to contract, instead of which, it’s grown, only by a little bit, it’s grown over the quarter. I believed then and I believe now that the U.K. will be resilient this year,” Hunt said on Friday. “The bigger picture is one that is encouraging for the U.K.”
Domestic concerns
High inflation has loomed large and scantly abated over U.K. economic prospects, with waves of workers across the transport, health and education sectors taking to the streets to demand pay increases to meet rising household expenses in recent months.
Hunt said negotiations to resolve strikes were under way, but played down pay increases as a cure-all solution.
“The one thing we won’t do, just as you say, is to agree to pay awards that fuel inflation, because that then, we will just be making the situation worse. And that has made it a very difficult period for industrial relations,” he said.
Questions linger over the extent to which British consumers have experienced the full extent of inflationary pressures, particularly in the housing sector. Hunt acknowledged that the U.K. mortgage model — whereby buyers enter fixed-rate payment plans of typically three to five years — has partly shielded the economy from further bruising and prevented even steeper declines in house prices and mortgage rates.
“Because of fixed-rate mortgages there is a delay in the pass through time,” he said. “But there will be an effect because every month a certain number of people have to renew their fixed-rate mortgages, and so you do get a dampening effect on demand, as a result.”
In its April House Price Index, mortgage lender Halifax found that British house prices last month ticked up by just 0.1% in annual terms, slowing from 1.6% in March and 10.9% in April 2022.
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