The Bank of England chief economist stated on Thursday that future decisions on interest rates would be “more finely-balanced” following the release of data suggesting that the UK economy had been near stagnant in the third quarterly.
The Office for National Statistics reported that the gross domestic product increased by 0.2% between July and August. This was due to a recovery in the service sector. The increase was a rebound from a 0.6% contraction in the previous month, when wet weather and strikes disrupted the economy.
Huw Pill warned against the notion that central banks will change their policy in response to short-term data changes. He said: “The idea of a policy response or stance changing on a sixpence, is overdrawn.”
Pill said, however, that the effects of the BoE’s monetary tightening in the last two years were still being felt by the economy. He said that the question of whether or not we’ve done more is becoming more balanced.
His comments will likely reinforce expectations that, when the Bank of England’s monetary policy meeting takes place next month at its monthly policy committee, interest rates will remain unchanged at 5,25 percent. The aim is to get inflation back on target by maintaining a tight policy rather than tightening further.
Swati Dhingra said, on Thursday, that the high interest rates are affecting growth and the lives of young people, especially those who are more vulnerable.
The economy has already stagnated. Dhingra, speaking to BBC, said that only 20 or 25 percent of the effect of interest rate increases has been felt by the economy.
Dhingra has been voting against rate increases ever since he joined the MPC as a member in August 2022. He also stated that high interest rates, just like inflation, will affect younger and less educated people.
In September the BoE held interest rates at 5,25 per cent. This marked the peak in borrowing costs after nearly two years of rate increases.
ONS data released on Thursday revealed that the UK economy in August was smaller than the peak of 2022, which occurred last May. This shows the effect of persistently high borrowing costs and inflation on UK output.
Sandra Horsfield is an economist at Investec. She said that the GDP figures show “the harsh medicine of very rapid rate increases has started to take effect”.
Yael selfin, KPMG UK’s chief economist, said that the economy had entered a slowdown of a wide scope in late summer. This has worsened in recent months.
She added that the UK economy is still feeling the effects of high prices and interest rates. The full impact of previous tightening has yet to be felt.
The Bank of England’s Credit Condition Survey, which is a quarterly survey of building societies and banks, provided further evidence of the economic impact of high borrowing rates on Thursday.
The report showed that the percentage of lenders who reported an increase in the number of household defaults for mortgages during the last three months, minus the number of lenders who reported a decrease, grew to 43 percent, the highest level since the second quarter 2009.
The default expectations for the following three months was even higher.
Sanjay Raja is an economist at Deutsche Bank. He said that he expects “growth to become sluggish over the next few quarters, with the UK’s economy walking a thin line between stagnation and recession”.
The professional services sector and the education sector were the major contributors to GDP in August 2023.
In July, the disruption of education was caused by walkouts in schools across the nation.
Samuel Tombs of Pantheon Macroeconomics said that the muted recovery in August was due to increased output in education and health as the strike disruption subsided, “rather” than an underlying momentum in the economy.
The output of consumer-facing services such as bars, restaurants and entertainment fell by 0.6 percent in August, and was still 4.3 percent below the levels in February 2020, before the Covid-19 Pandemic.
Kitty Ussher is the chief economist of the Institute of Directors. She said that the fallback shows “recent rate increases are forcing households to budget more carefully as they face rising mortgage costs”.
The manufacturing output fell by 0.8 percent in August. Construction also saw a drop of 0.5 percent. This was a continuation from the contraction in the previous month.
The purchasing managers’ indicator, which is a more timely survey, predicts further declines in the manufacturing and construction outputs in September.