Weekly news update

“I don’t think that we can say definitively that interest rates have peaked”

Last week, during their final meeting of 2023, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) voted by a six to three majority to retain Bank Rate at 5.25%, with the minority voting to the rate by 0.25%. This outcome was widely predicted, with all but one of 68 economists in a recent poll expecting the BoE to hold Bank Rate.

BoE Governor Andrew Bailey said that it’s too early to speculate about when UK interest rates will be cut, adding, “I don’t think that we can say definitively that interest rates have peaked. I hope that we are at the top of the cycle.” Although encouraged by the efforts made to cool inflation in the UK so far, Mr Bailey said there is still a “persistent element” to inflation which “we have got to take out.”

From an inflation perspective, the MPC’s December summary outlines that Consumer Prices Index (CPI) inflation is expected to stay close to its current rate around the turn of the year, with a temporary increase in service price inflation expected in January. The report reiterates that, ‘monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.’ The next MPC meeting is scheduled to conclude on 1 February 2024.

And across the pond

Also last week, the US Federal Reserve held its key interest rate steady for the third consecutive meeting, with the Federal Open Market Committee voting unanimously to retain the benchmark borrowing rate in a targeted range between 5.25% – 5.5%. With inflation easing, US policymakers indicated the likelihood of multiple cuts in 2024, assuming quarter percentage point reductions. Fed Chairman Jerome Powell cautioned, “It is far too early to declare victory. There is a lot of uncertainty and we’ve seen the economy move in surprising directions so we’re going to need to see further progress,” he added that the key interest rate was now “likely at or near its peak for this tightening cycle.”

UK economy shrinks in October

The most recent GDP data from the Office for National Statistics (ONS) shows the UK economy contracted by 0.3% in October, following growth of 0.2% in September. The reduction was higher than the widely anticipated 0.1% reduction predicted, with bad weather and higher interest rates impacting consumers and taking their toll on growth. The manufacturing, construction and service sectors all contracted in the month. Responding to the data, Jeremy Hunt said that while interest rates are elevated to combat inflation, it is “inevitable GDP will be subdued.”

Consumer confidence

Data released last Friday showed that consumer confidence rose in December, with households more optimistic about their future financial situation. Confidence has risen for the second consecutive month, up by two points to -22, making it an improvement on the -29 recorded the same time last year. GfK Client Strategy Director Joe Staton commented on the dataset, “Against the backdrop of flatlining economic growth, interest rates at a 15-year high and price rises potentially eroding disposable income for years to come, the consumer confidence index shows a modest improvement this month… Although the headline figure of minus 22 means the nation’s confidence is still firmly in negative territory, optimism for our personal finances for the next 12 months shows a notable recovery from the depressed minus 29 reported this time last year.”

He continued, “Despite the severe cost-of-living crisis still impacting most households, this slow but persistent movement towards positive territory for the personal finance measure looking ahead is an encouraging sign for the year to come.”

Christmas dinner more costly in 2023

If you favour a traditional festive meal on Christmas Day, this year you’re likely to find that it will cost you 13% more than in 2022, according to research. Thanks to inflation elevating food prices and energy bills, combined with poor growing conditions for vegetables, people will have to pay at least £4.14 a person for their festive meal, compared with £3.67 in 2022. This is based on analysis of the cheapest price for a basket of 11 Christmas dinner items. While the rise in cost is almost triple the overall current rate of inflation, the increase is lower than the 35% jump in the cost of Christmas dinner recorded last year (2021 to 2022).

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