UK Interest Rate Increase and Bank of England’s Monetary Policy Report: At its meeting this week, the Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to increase the Bank Rate by 50 points to 4%, the highest rate for 14 years. This comes int eh context of the US Federal Reserve raising its benchmark rate to a range of 4.5% to 4.75% – an increase of 25 points and their highest rate for 16 years – and the European Central Bank also implemented a 50 points rise in the three key rates that it controls.
The main driver of this decision is outlined in the MPC minutes in which, while acknowledging that inflation will fall this year, notes that the labour market is still tight and domestic price and wage pressures have been stronger than expected. Measures of inflation expectations are still at elevated levels and the risks for the medium term are large and skewed to the upside, at least in terms of persistence of rates well above the MPC target of +2%.
The two dissenting voices on the MPC wanted to keep the rate unchanged (at 3.5%), arguing that there were already signs of inflation falling and the labour market easing within a weak economy. However, their main point appears to have been that with the typical delays in the impact of increasing interest rates – the Governor acknowledged that the full effect of the interest rate rises to date has yet to come through – there was no need for a further increase at this stage as the earlier rate increases will do the job of reducing inflation.
There was also an interesting development in the signalling for future rate changes. In the MPC minutes and press conference, there was a clear message that this is likely to be the last increase – this is a change from the previous meeting where the messaging was very much about another increase coming in this meeting. However, in the ECB’s announcement, they made it clear that they intend a further 50 points increase at their next meeting towards the end of March.
While the forecasts from the Bank are mainly about inflation, there has been a very large shift compared to last November in their view of the UK economy in their quarterly forecasts. In the previous edition, they expected an overall fall in UK GDP of -3% and for the quarter-on-quarter declines which define a recession to run for two years (8 quarters from Q4-22); now, they only expect a fall of just under -1% and for it to run for only 5 quarters from Q1-23.
They note that this revision is mainly due to lower energy prices than expected 3 months earlier, coupled with a moderation on mortgage rates (their November forecast was made in the wake of the Truss government’s disastrous mini-budget). The MPC also now expects the easing in the labour market to be met by a reduction in vacancies and hours worked rather than a significant increase in redundancies and unemployment. This calms concerned consumers and leads to higher consumption (and lower precautionary savings) than had been expected in the previous forecast.
As part of the Monetary Policy Report for this meeting, we have the latest update from the Bank’s local Agents; in it they note that economic activity remains weak and manufacturing (and construction) output volumes continue to fall compared to a year earlier. However, this fall in manufacturing was mostly in consumer goods and construction products with defence and aerospace firms reporting strong growth. Export demand was flat.
The Agents contacts report that investment intentions are being affected by uncertainty, weaker demand and tighter financial conditions and projects are being delayed, although larger firms with cash buffers or ready access to finance were largely continuing with investment. Input cost inflation continues to ease with lower prices for steel , chemicals and, in particular, freight rates. So, while many manufacturers reported making above-normal price increases, the size and frequency of these changes is diminishing.
You can access the Monetary Policy Report on the Bank of England website at https://www.bankofengland.co.uk/monetary-policy-report/2023/february-2023; by scrolling down to the report section of this page, you can use the side menu to jump to the section on the Agents’ update on business conditions.
UK Productivity, 3rd Quarter 2022 and International Comparisons for 2021: The Office for National Statistics (ONS) has recently published two articles on productivity. The preferred measure of productivity is output per hour worked and, on this basis, productivity in the 3rd quarter of 2022 was +1.6% higher than the average for 2019 (before the pandemic). This was generated by a fall in the number of hours worked coupled with a small increase in output.
Output per hour increased by +0.1% compared to the previous quarter and was +0.9% higher than a year earlier (Q3-21). Output per worker was only +0.5% higher than in 2019, fell by -0.1% compared to the previous quarter but grew by +1.4% compared to a year earlier.
These figures are for the whole economy but this data release also includes the figures broken down by industry. For manufacturing, output per hour was +9.1% higher than the average for 2019 but fell by -3.0% quarter-on-quarter and was -9.3% lower than a year earlier. As for the whole economy, the improvement compared to 2019 came from an increase in GVA and a fall in hours worked; the fall compared to both the previous quarter and a year earlier came as a result of the opposite trends with an increase in hours worked coupled with a decline in gross value added (output).
A couple of weeks earlier, the ONS published an international comparison of productivity using annual data for 2021, putting the UK alongside the other G7 countries (Canada, France, Germany, Italy, Japan and the USA). The headline figure showed that output per hour worked in the UK economy was lower than in France, Germany and the USA but higher than in Canada and Italy (Japan’s data is not available for 2021 but earlier figures showed them to be a long way behind all of the other G7 countries).
Use of annual data makes comparisons less useful since the latest figures (2021) would be compared with 2020 which was the height of the pandemic. However, taking these two years together and comparing them with the 2019 level, output per hour worked fell in the UK (-1.2%) but increased in Canada (+0.5%), France (+1.5%), Germany (+0.2%), Italy (+0.4%) and the USA (+3.1%) – again, Japan’s data for 2021 is not yet available.
You can find more details of the 3rd quarter productivity data, including a more detailed breakdown by industry of the ONS website at https://www.ons.gov.uk/releasecalendar (26 January); this is also the location for more on the international comparisons (this release is dated 11 January).