ICAEW: Bank of England interest rate rise ‘ill-advised’
Interest rate hike to lead to more business turbulence, argue accountants
Interest rate hike to lead to more business turbulence, argue accountants
The Bank of England (BOE) has shown that it is “behind the curve” on interest rates following a further quarter percentage point rise this week, according to Suren Thiru, economics director at the ICAEW.
Despite speculation that increases in borrowing costs would be halted following recent turmoil in the banking sector, the BOE’s Monetary Policy Committee voted overwhelmingly in favour of an 11th consecutive rise on Thursday morning, bringing the rate to 4.25%.
The Committee’s decision follows February’s surprise leap in inflation to 10.4%, with food and drink prices predominantly driving the rise.
“The decision to raise interest rates looks a little ill-advised against a backdrop of economic uncertainty and financial market volatility,” said Thiru.
Thiru added that the BOE “remains behind the curve on interest rates”, arguing that it was too late to tighten monetary policy when inflation surged in 2021, with the latest rise coming amid “a flatlining economy and financial market turbulence”.
He also argued that the lagged impact of rising rates on the economy means that damage to businesses is “yet to be fully felt”.
This stance is shared by Glenn Collins, head of policy, technical and strategic engagement at the ACCA. Though perhaps necessary to stabilise the economy, businesses will feel the sting of the fresh rate hike, he says.
“ACCA members recognise the need for interest rates to move as we fight inflation, but they are also concerned that the rising cost of borrowing is going to be another blow to businesses in their efforts to fund investment, at a time when they are facing increased costs across the board.”
Collins adds that lenders must work with businesses who are borrowing funds to avoid unnecessary damage to business prospects.
But taking a more optimistic view, the ICAEW’s Thiru added that with lower energy costs set to drive a fall in inflation this year, the case for cutting interest rates “is only likely to grow”.
Similarly, Martin Beck, chief economic advisor to EY’s Independent Treasury Economic Model (ITEM) Club, argued that the latest rise will likely be the last in the current cycle.
“The incoming data appears to be weakening the case for further rate rises. Rises in pipeline price pressures have continued to slow, wages growth has eased, and energy prices have fallen further.”
Minutes from the MPC’s meeting minutes on Thursday show an increase in economic optimism from the Bank, with GPD now expected to rise in Q2 2023, up from the 0.4% decline previously forecast.
This change would mean that the UK will avoid a technical recession this year, defined as two consecutive quarters of economic contraction.
“This will be sufficient to sway a majority on the MPC to vote for no change by the time the committee meets next in May,” Beck added.
“By that point, headline inflation should have begun to meaningfully turn down and pipeline price pressures should look increasingly benign.”
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