Mortgage rates will continue to rise, further punishing homeowners. It’s bad news for the rest of the economy, too, as higher squeezing businesses and make consumers poorer.
The UK economy shrank in both October and November, and the downturn now looks set to accelerate in December. We could be in a recession by March.
The UK desperately needs a string of interest rate cuts, to boost sentiment and get the economy moving again. But we’re not going to get it.
Just a couple of months ago, Goldman Sachs predicted UK interest rates would plunge to just 2.75% by next autumn.
Nobody is forecasting this kind of drop now. We may get just one single rate cut next year, leaving base rates at 4.5% by the end of the year.
So what’s changed?
Labour chancellor Rachel Reeves has made a hash of the UK economy, and now the BoE’s rate-setting monetary policy committee (MPC) dare not cut.
Reeves’s horror Budget is inflicting more damage by the day, even though some of the most disastrous measures haven’t even come into force yet.
Her plan to impose £25billion of national insurance tax hikes on businesses will drive prices back up from next April, as firms pass on the cost to consumers.
Reeves is borrowing £30billion to spend on public services, which will flood into the economy pushing up prices.
Consumer price fell to 1.7% in September. It’s since climbed to 2.3% in October and 2.6% in November.
Once Labour’s Budget tax and spending hikes come into force, inflation is forecast to top 3%.
Two other factors have contributed to the inflationary surge. First, energy prices are rising again. Second, US president Donald Trump’s proposed tax cuts and tariffs will keep inflation high.
Reeves should have avoided adding fuel to the fire, but couldn’t resist. Or didn’t realise what she was doing, a point of view that becomes more persuasive by the day.
I’ve been critical of the BoE governor Andrew Bailey in the past, but today Reeves gave him no choice.
Literally nobody was expecting the MPC to cut today.
That’s despite the fact that both the European Central Bank and US Federal Reserve both cut rates in December.
If the MPC had cut this would have spooked markets, by suggesting it had received some bad news that the rest of us don’t know about yet.
Now all we can do is wait to see whether the BoE will start cutting rates next year, and how bad it gets before it’s forced to do so. At the rate we’re going, it could be very bad indeed.
