Macroeconomics: UK economy, IB Economics

UK inflation has tumbled to 2.3% for April, down from 3.2% and fuelling calls for interest rate cuts. However, there are some cautionary noises coming from some who note that service sector inflation has scarcely shifted and this might make the Bank of England reluctant to cut rates in June. 

It seems as though food prices are returning to normal, with the news that food price inflation has fallen to 2.4% - it's lowest since October 2021, fuelling hopes of interest rate cuts this summer. 

However, the composition of shopping baskets has changed since then, with own-brand goods providing a greater proportion of all goods bought and it will be interesting to see if this alters should the economy start picking up.

The latest inflation figures are going to be released this week and the consensus view is that significant falls in energy prices will contribute to a similarly significant fall in inflation. 

As ever, the government will no doubt take credit for this - but the picture for the rest of the year, and the prospect of interest rate cuts might mean that keeping inflation low will prove to be problematic. 

Larry Elliott's take on the future trajectory of interest rates; they're liable to come down in the very near future and they may fall further, although I fear that Table Mountain isn't going to be symmetrical. There were 14 interest rate rises from December 2021 to August 2023. 

I doubt there are going to be 14 rate cuts in the months ahead.

It seems as though the Bank of England is inching towards interest rate cuts, even though today's decision sees rates held. However encouraging data saw two members of the MPC vote for rate cuts, and seven to hold them constant. 

Either way, it seems as though monetary loosening is on the way.

Another week, another interest rate decision. 

Phillip Inman looks at the prospects for a rate cut and concedes that there's little prospect of a reduction in rates soon, not least given signs that the economy's recovering and the decision of the Federal Reserve to keep rates unchanged.

The moribund state of the UK economy is expected to extend into 2025, with the OECD forecasting UK growth of 1.0%, after 0.4% growth this year. It's believed that interest rates are going to stay higher for longer, meaning that of the G7 nations, only Germany is forecast to experience lower growth.

As a result of the stubborn nature of UK inflation the Bank of England's Chief Economist has indicated that there's little immediate prospect of a summer cut in interest rates.

It seems as though the MPC consensus is that the relative strength of the labour market is an ongoing concern and that this needs to demonstrate greater weakness before rates are cut, even though it seems as though the UK is recovering from recession.  

Inflation is down again, to 3.2%, the lowest since September 2021. It's disinflation - a fall in the rate of inflation - although prices are still rising. That said, be warned, prices falling is not necessarily a good thing and you should be capable of explaining why.

Whether or not this translates into lower interest rates is more debatable - not least given the Federal Reserve's position on the issue.

Larry Elliott's take on the Bernanke Report into the Bank of England's performance: for him, I don't think he's actually as scathing as he might be. I reckon he'd award the Bank a C grade. 

I agree with his criticism of the Bank predicating its interest forecasts on what the markets think is going to happen to rates. Given the fact that the MPC contains a number of people who are well-connected in this regard, it strikes me that this is likely to create group-think, and a degree more independence might be more helpful. 

From my perspective, I've always thought that the MPC is drawn from a very narrow group of people with very little in the way of a feel for the lives of ordinary people. They would argue that this is part of the remit of the Bank's agents, but I'd disagree; the agents aren't sitting in the room determining the future direction of interest rates, and to me that matters. 

So, if the Governor of the Bank of England wants to come calling, I'm sure I could find time to sit on the MPC. I don't think I'd do a job that's any worse than current or former members. And I've met a number of the latter group.

A more hawkish position on monetary policy from within the MPC, albeit an external member. However, Catherine Mann is of the view that markets think rates will fall faster than they are likely to, and that the Bank is under no obligation to cut rates to keep markets (or the government) happy. 

Today's the day. Most people expect rates to be unchanged, so a case of "As you were", then...

The Guardian's take on today's fall in inflation. Yet again, it speculates about the impact of this on the future trajectory of interest rates. 

The IMF has suggested that the UK economy is going to grow more rapidly than it originally forecast at the start of the year, in part because of the loosening of monetary policy. The growth forecast has been raised to 0.7% this year and 1.5% in 2025, and they also expect the Bank of England to cut interest rates three times before the end of the year. 

Of course, the IMF aren't always right - something that notably economists, like Jacob Rees-Mogg are always keen to tells us - but then again, who is?

This week's inflation figures are going to be interesting with many people anticipating a marked fall in inflation, to close to target. As a result, many are predicting that the Bank of England is going to lower interest rates at some point in the next few months, not least given the latest admission of the Deputy Governor of the Bank, Ben Broadbent. 

I'm not sure whether I'd be keen to accept the 'expert' opinion of Jacob Rees-Mogg on a need to review the Bank of England's independence, however, it seems as though the right-wing of the Conservative Party want to return to monetary policy being determined by politicians.

Oh dear! What's happened to the notions of credibility, transparency, accountability? 

The Guardian take on today's interest rate decision: effectively saying the same thing but perhaps providing a little bit more information about some of the headwinds that have persuaded a few MPC members to stay their hand. In this case, it's the fear of supply chain disruption, linked to the Middle East that some fear will keep inflation higher than would otherwise be the case.

Nothing to see here, with today's interest rate decision unlikely to see a change in the base rate, with many expecting the bank to hold fire until the summer. 

However, leaving things unchanged is as much of a decision as changing rates, and will have wider implications for the macroeconomy. 

Kenneth Rogoff writes an interesting piece about the diminishing ability of government debt to help offer macroeconomic stability at a time of higher interest rates. 

The latest IMF research asserts that the rising levels of debt in developed economies now represents a drag on growth, as it rises to an average 120% of debt-to-income in advanced economies. 

Whilst developed economies rarely default on debt, the opportunity cost of higher debt repayment will limit the ability of fiscal policy to help governments achieve their macroeconomic objectives. 

And, as if by magic, the uncertainty regarding future interest rates cuts has fed through into mortgage markets, with some lenders raising their fixed-rate mortgages a few fractions of a per cent.

This, of course has implications for consumer spending: in the first place, it raises housing costs and probably reduces consumer spending in this way. Secondly, it's likely to deflate asset prices - such as the stock market - and the negative wealth effect of this is also likely to feed through into lower spending too.

It looks like today's inflation data is going to mean that interest rate cuts are being put on hold for another month or two, depriving the Prime Minister of a pre-election boost from expansionary policy. 

Oh dear. What a pity. 

The latest UK labour market data suggests a slowing economy, although unemployment figures often lag behind economic growth data. However, unemployment is up to 4.2%, from 3.9%, and some are wondering whether this might prompt the Bank of England to cut interest rates sooner rather than later. 

Criticism of the forecasting techniques of the Bank of England has come in an independent report into its operation, courtesy of the former Chair of the Federal Reserve, Ben Bernanke.

Not only has he criticised its methods, of gathering information and forecasting, but he's also critical of the conduct of monetary policy arguing that recent incrementalism, and a reticence to raise interest rates more quickly has damaged the economy, contrasting this with the approach of other, bolder central banks. 

This piece suggests that whilst the UK economy is recovering - inflation is falling, economic growth slowly picking up and monetary policy likely to soften in the months ahead - it's not going to be enough to sway voters in any forthcoming General Election. 

And Larry Elliott's follow-up piece - when will interest rates be cu, effectively rehashing an article he wrote all of three days ago. He wants them to fall sooner rather than later.