BoE Hike Rates to Another 25bps!

Inflation is falling, but still too high…

BoE has raised interest rates to make sure inflation keeps on falling and stays low…

BoE expect inflation to fall markedly further this year and meet their 2% target by early 2025…

Inflation is falling, but still too high…

Amidst a backdrop of a declining infection rate and a growing economy with low unemployment in the UK, one concerning issue still looms: inflation remains unacceptably high. In June, prices surged by a staggering 7.9% compared to the previous year, significantly surpassing BoE targeted inflation rate of 2%.

BoE responsibility is to ensure stable and low-price increases in the country. To achieve this, they have taken the step of increasing interest rates to 5.25% this month. While this may result in higher costs for some individuals, it is a necessary measure to combat the potential long-term effects of elevated inflation.

BoE recognize the challenges this may pose for those already facing financial pressures. However, allowing inflation to persist unchecked would negatively impact everyone, particularly the most vulnerable among us.

Looking ahead, BoE anticipate inflation to gradually decrease to around 5% this year and ultimately reach their targeted 2% rate by early 2025. This controlled rise in prices will provide some relief while also ensuring a stable and sustainable economic environment for the future.

 Inflation in the UK has shown signs of improvement as it begins to decline. In June, prices rose by 7.9% compared to the previous year, a notable drop from the 11.1% recorded last October. This decline can be attributed, in part, to the stabilization of energy prices, which had previously been on the rise.

However, despite this positive development, inflation remains persistently high, significantly surpassing BoE target of 2%.

This surge in prices has been triggered by a series of substantial shocks.

The initial shock came from the Covid pandemic, prompting a shift in consumer behaviour towards buying more goods than services. Unfortunately, suppliers faced difficulties in meeting the increased demand, leading to higher prices, especially for imported goods.

The second shock was the invasion of Ukraine by Russia, resulting in a sharp escalation in gas prices and subsequently driving up food costs. Compounded by poor harvests in other countries, food prices in June escalated by 17% compared to a year ago.

The third shock emerged from a substantial reduction in the available workforce due to the pandemic. To attract potential employees, employers have had to offer higher wages, which in turn forced many businesses, especially in the services sector, to raise prices to accommodate the increased labour costs, as wages constitute a significant part of their expenses.

High inflation affects all individuals, but it disproportionately impacts those who are least able to afford it.

BoE primary focus is now on stabilizing inflation and returning it to their targeted rate of 2%, while also ensuring it remains at that level in the future.

BoE has raised interest rates to make sure inflation keeps on falling and stays low…

BoE primary objective is to ensure inflation returns to their targeted rate of 2% as mentioned above. To achieve this, they have implemented a strategy of raising interest rates on mortgages, loans, and savings.

As of yesterday 03/08/2023, at 21:00 on Sydney time, BoE have increased the interest rate to 5.25% that is an increase of 25bps (0.25%). Since December 2021, the interest rate has been raised from 0.1% to its current level.

Higher interest rates lead to more expensive borrowing, which, in turn, encourages people to save rather than spend. As a result, overall spending tends to decrease, leading to a slower rise in prices and a subsequent reduction in the inflation rate.

BoE express: “We understand that this may result in higher borrowing costs for many individuals, especially since approximately one in three households in the UK have a mortgage. However, it is crucial to address high and sustained inflation, as it ultimately exacerbates difficulties for everyone, particularly those who are most financially vulnerable. By taking these measures, we aim to create a more stable and sustainable economic environment for all.”

BoE expect inflation to fall markedly further this year and meet their 2% target by early 2025…

As I analyse the current economic landscape, and the BoE projections it indicates that inflation is anticipated to experience a further decline, settling at approximately 5% by the conclusion of this year. However, it's worth noting that specific sectors, such as food, may witness faster price increases, while energy bills are expected to recede due to the recent significant decline in gas prices.

In BoE endeavour to combat inflation, the implementation of higher interest rates plays a crucial role. By curbing the demand for goods and services within the economy, this measure is poised to effectively slow down the inflationary trajectory.

Looking ahead to the coming year, BoE remain optimistic about the continuous downtrend of inflation. The forecast indicates that this trend will persist, leading to the realization of their targeted 2% inflation rate by early 2025. It's important to emphasize that while prices will continue to rise, the pace of these increases will be gradual, ensuring a more stable and sustainable economic environment for the populace.

Again, BoE primary responsibility is to ensure a steady and controlled inflation rate, thus safeguarding the financial well-being of all individuals and fostering a thriving economic future. Through meticulous analysis, proactive measures, and strategic planning, they strive to navigate the economic landscape in a manner that benefits everyone and ensures long-term prosperity.

Sources: All the images has been taken from BoE public website.

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