The Bank of England (BoE) has decided to maintain its main policy rate at 5.25%, pausing after 14 consecutive hikes, according to a report published on Tuesday. This decision comes as core and services inflation in the UK showed a significant reduction in August, despite overall levels remaining high.
The latest UK Economic Outlook report by S&P Global Ratings suggests that this could be the final increase in this cycle, provided pay growth, which was at 7.8% in July, starts to ease. “Still, the bank will unlikely be put at ease until pay growth starts easing, too,” the report commented.
However, S&P Global does not anticipate the BoE to begin lowering rates again until the second quarter of 2024. In the interim, the effects of tighter financing conditions are already being felt throughout the economy and are expected to continue until they reach their full impact.
S&P Global predicts that economic growth will remain subdued well into next year, bringing the UK close to stagflation due to high inflation and monetary policy rates “that will turn increasingly restrictive in real terms as inflation abates.”
The ratings agency expects headline inflation to remain high but gradually fall back close to the BoE’s target of 2% in the second half of 2024. It further stated that its fundamental view of the UK economy remains largely unchanged from its late June forecast. However, it revised its forecast for this year slightly upward, to 0.3% from zero, but downward for 2024 to 0.5% from 0.8% in its previous forecast.
The report also noted that real wage growth has turned positive. “Together with a labor market that should remain firm by historical standards, this should mitigate an otherwise constrained growth environment,” S&P Global said.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Read the full article here