Every central banker dreams of their ‘whatever it takes‘ moment, a reference to then ECB President Mario Draghi’s 2012 commitment to preserve the euro.
Bank of England Governor Andrew Bailey gave it a good go today. Having seen his reputation eroded by a perception the Bank has been too slow to respond to rising prices, he declared that “returning inflation to its 2% target remains our absolute priority, no ifs, no buts.” Of course, this will have consequences.
There are things that cannot be said, even if they are true. You should never tell your partner they look tired, no matter how self-evident it appears. Ministers can never advise the public to put on a jumper, regardless of how high energy prices climb. And the Governor of the Bank of England will never explicitly say a recession is welcome or necessary to bring inflation down, even if that is the direct consequence of repeated interest rate rises.
But following today’s 0.5 percentage point rise, the highest for 27 years, the Bank forecasts the UK economy is set to enter recession later this year, with output to fall in each quarter from Q4 2022 to Q4 2023. That is 15 months.
But we’ll roar back to boom times straight after? Nope. “Growth thereafter is very weak by historical standards.” If you want a quick and dirty historical comparison, we’re looking at a rerun for the early 1990s recession.
As for inflation – the reason rates are rising in the first place – the Bank now predicts it’ll hit 13 per cent by the end of the year and remain high (above 9 per cent in a year’s time).
At least with a 50 basis points rise the pound should gain some strength versus competing currencies? Wrong again. Sterling slipped 0.5 per cent against the dollar and 0.7 per cent against the euro.
But here’s the gut punch. The Bank says real post-tax household income will fall by 1.5 per cent in 2022, despite factoring in the near-term fiscal support (cash for energy bills) announced by the government in May. Incomes will fall by 2.25 per cent in 2023. In short, a living standards calamity, making further government borrowing (RIP fiscal headroom) to support household bills inevitable whoever wins this leadership election (unbelievably, still a month to go).
Whenever it started to rain, my grandma would often remark that it was ‘lovely weather for ducks’. If you can see a silver lining in these figures, do let me know.
And finally – after all that – my favourite story of the day. The best restaurants in London to take your parents. Though for a couple of these, my strong expectation is that they would pick up the bill.
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