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UK business is hoping that the BoE will turn to support the economy.

  • Thursday, November 30, 2023

The Office of National Statistics (ONS) confirmed in November that the UK economy grew by 0% in Q3. This news was a disappointment to the UK stock market with both FTSE 100 and 250 falling over 1% on the news. Analysts had predicted a -0.1% reduction in growth so that no fall in GDP was better than expected but still disappointing. These results mean that the UK has avoided recession in 2023.

The stagnant economy was put down to consumer demand. A sign that households are feeling the squeeze. House sales and mortgage approvals fell so hitting the housing market.

Chancellor Jeremy Hunt has been under pressure to offer a boost to UK voters ahead of next year’s General Election. In last week’s Autumn Statement, he did cut business taxes and National Insurance rates for both the self-employed and employed workers in a boost to employment. But with £6bn of head room on the UK £2.6tn debt pile there was little room to manoeuvre.

With interest rates at 5.25% and 10-year gilt yields at 4.28%, the debt repayments on the government debt pile will hinder any ambitions of Jeremy Hunt or whoever succeeds him at No 11 Downing St. For each 1% in interest rate the UK tax payer pays an additional £15bn in annual interest payments.

In March’s Budget Statement, the Office of Budget Responsibility (OBR) thought that UK base rates would peak at 4.25% but we are 1% above that position and expect our current 5.25% rate to stay in place for several more months.

Last March there was a forecast for £89bn of debt interest spending but this is now likely to be £109bn. Hence the Treasury and BoE desire to see inflation fall. Any falls in interest rates would save the Government significant amounts in reduced borrowing costs as credit is refinanced. Falling interest will also reduce the losses from selling bonds that were bought as part of the quantitative easing programme.

When the OBR run the numbers for Chancellor Jeremy Hunt’s Autumn statement, they will have done so at the hight of interest rates and therefore bond repayments at their highest.
The signs that the UK job market is starting to slow helped the BoE to pause interest rate rises. UK unemployment now stands at 4.2% up from 3.7% twelve months ago. Businesses appear to be hiring less as the cost of living and high interest rates hit consumer spending. Output from British private companies have fallen in Q3.

The BoE are conscience that the full impact of past interest rate rises is yet to hit the economy and that younger and lower paid workers could be hit the hardest. The UK could be facing harder times over the winter and into the spring.

Capital Economics has suggested that ‘a mild recession is underway and that the BoE has finished hiking rates.’ This view is in line with other economists and business leaders are hoping that the BoE will turn to support the economy soon once inflation has fallen further.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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