A panel of 13 academics, economists, mortgage and savings experts, compiled by the personal finance comparison site, finder.com, almost unanimously agree that there will be a 0.25% increase to interest rates on the 11 May next month.
However, a quarter of those predicting this rise think it is the wrong decision, citing the threat of a recession, bank collapse and the lack of demand surge as the key reasons why another rate rise is unlikely to have the desired effect.
Inflation and wage growth leave the BoE with no choice but to raise interest rates at the next MPC meeting
12 out of the panel of 13 experts were in agreement that there will be a 0.25% increase to interest rates on the 11th of May 2023. The recurring factors cited for this prediction were higher than expected inflation and rising wage growth in the UK.
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Charles Read, fellow in economics at the University of Cambridge, said: “There is clearly more inflationary pressure in the economy than forecasters both inside the Bank of England and outside it had predicted.”
Konstantinos Lagos, senior lecturer in business and economics at Sheffield Hallam University echoed this sentiment, “The UK appears to be an outlier currently in comparison to the rest of major western economies (mainly US and EU), with UK inflation remaining stubbornly high”.
Wage inflation was another factor frequently cited, with Giles Coghlan, chief market analyst at HYCM commenting “with wage growth data coming in hotter than expected, the general consensus going into this meeting is that the Bank of England needs to continue to cool the economy and avoid a wage-price spiral in its battle to bring inflation down to its 2% target.”
A quarter of experts predicting a rate rise think it’s the wrong decision
When asked if they would agree with a decision to raise interest rates, a quarter of the panellists do not agree that raising interest rates again would be the right thing to do.
Alan Shipman, senior lecturer in economics at the Open University explained that higher interest rates are not the best way to tame inflation in this case, “any price stabilisation they achieve is via lower demand (from investment as well as consumption), higher unemployment and increased poverty, which is an economically inefficient and socially unjust mechanism”.
Another academic, Alper Kara, head of finance and economics at the University of Huddersfield, was in agreement. He said “I think there is no reason to increase the rates and the inflation was not really due to the demand surge”.
David McMillan, professor in finance at the University of Stirling added that increasing interest rates again could pose a real risk to the banking sector, “A further complicating factor is the recent turmoil in the banking sector (notably the US). One of the reasons for this, is the unanticipated effects of higher interest rates on creating stresses within banks”.
On the other hand, 9 out of 12 experts (75%) thought that increasing the base rate would be the right decision.
Stephen Sillars, savings and investment editor at Chip commented, “Prices are soaring and anything other than raising the rate would send the wrong signals”.
Jon Ostler, CEO of finder.com agreed, noting that the UK is short of alternative options, “Until there are real signs of inflation falling I think it would be premature to soften on interest rates” adding that “while inflation persistently stays high there are few good options”.
Experts divided on how the MPC should proceed with interest rates
When asked how the BoE should proceed for the remainder of the year, the panellists were split 50/50 on whether they should take a more hawkish or dovish approach. When Finder last conducted this panel back in February 2023, only 36% of experts believed the BoE should be hawkish, this has now increased to 50% of panellists with these experts believing there is no other choice in the battle to curb UK inflation.
Luciano Rispoli, senior lecturer in economics at the University of Surrey believes that “Given the current (elevated) inflation rates, the number one priority of the MPC should be, “whatever-it-takes”, to increase interest rates so as to gradually revert inflation towards the 2% objective”.
Jon Ostler echoed this sentiment, saying “With no good options and sticky inflation I think we will remain hawkish”.
However, the remaining 50% of experts do not believe a hawkish approach would be effective in tackling the current economic issues the UK is facing
Muhammad Ali Nasir, associate professor in economics at the University of Leeds, said “I think MPC should not be more hawkish. They should in fact keep it there and reduce it to 4% if inflation comes down soon”.
Kate Anderson, deputy editor at finder.com, believes that “While it has left itself room for more rate hikes if inflation does prove sticky, it’s more likely to press pause on this rate cycle and give borrowers space to adjust to the new rate environment.”
Alan Shipman noted his shock at the MPC’s speed of raising interest rates so far, he said “The current inflation results largely from supply-side factors, and it’s inappropriate to respond with a rise in interest rates, which works – if at all – by squeezing finances of households who are least able to spend less without serious harm” adding that “the MPC should have been more dovish for the whole time since the energy price shock”.
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