The UK consumer will be retrenching on a scale more so than ever in recent history as higher borrowing costs along with price pressures continue to bite.
The Bank of England (BoE) voted almost unanimously (8-1), but as widely expected, for an outsized base rate hike by historical standards, for the UK at least, of 50 bps, bringing it firmly into line with the current worldwide quantum of central bank hiking. From being first out of the rate hiking blocks ahead of other central banks at the end of last year, this is now tacit acknowledgment that the previous 25 bps increases were falling short.
Just as the “Game of Thrones” prequel is about to hit British TV sets, the accompanying statement (and deteriorating messaging from the BoE’s previous outlook) from Governor Andrew Bailey that a recession is more than likely to hit the UK in the final quarter of the year and last through next year certainly suggests a painful ‘Winter is Coming’. With inflation remaining stubbornly high and getting worse in the autumn as energy price caps reset higher, one could argue that a much more aggressive policy response is required but that corollary assumes that rate hikes are having an effect on supply driven inflation problems. The obvious response is that they do not seem to be having any impact whatsoever with ongoing geopolitical shocks (the most obvious being Russia’s continuing war in Ukraine) derailing all policy forecasting.
Forcing people into making a choice between eating or heating seems a dangerous path to take with the Governor admitting that stagflationary forces are now the more likely medium-term outcome for the UK economy. But then he thought, like all other central banks, that inflation last year was transitory. Whether he is right or wrong, what we have to assume is that the UK consumer will be retrenching on a scale more so than ever in recent history as higher borrowing costs along with price pressures continue to bite.
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