The UK braces for a surge on interest rates amidst anaemic growth

The UK braces for a surge on interest rates amidst anaemic growth


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The Bank of England increased the basic interest rate to 0,75% on Thursday, well above the Swedish 0,5%.

The interest rate rise on Thursday makes UK interest rates the highest in Europe and takes place amidst economic growth deceleration.

Low-interest rates in the UK have fueled growth driven by domestic consumption, while business confidence and investment has been negatively affected by trade wars and Brexit. The interest rate rise has an immediate effect on the economy by triggering a rise in mortgages, subduing demand.

Currently, the unemployment rate in the UK stands at 4,2%, that is, a 43-year low.

The Bank of England fears that full employment will drive up wages too fast as businesses compete for the workforce, thereby increasing inflation.

Inflation in the UK now stands at 2,4%, boosted by currency devaluation and a surge in food and energy prices. Meanwhile, growth is anaemic and projected at merely 1,4% for 2018.

The first quarter of 2018 was the weakest in terms of growth for the last five years, although good weather and the world cup somewhat boosted growth since April.

The choice of rising interest rates to the highest level in Europe is not uncontroversial.

The UK does not have the highest rate of inflation in Europe, although the Eurozone has wide regional disparities. German inflation has surged over 2%, but core inflation that does not take into account food and energy prices stands at 1,4%. Inflation in Lithuania stands at 3,9%.

However, the UK economy is experiencing devaluation, which means more “import” inflation that erodes purchasing power. Puting an end to rising salaries after a decade of austerity is problematic.

The ECB remains cautious and has begun to unwind its quantitative easing programme, which is due to end in December 2018. Eurozone interest rates will not surge beyond the refinancing rate of 0% before the summer of 2019.

Perhaps, the only economy directly comparable to the UK is Sweden, which maintains its own currency. With growth for 2018 projected at 2,4% and unemployment even lower than the UK at 3,9%, the Swedish Central Bank has maintained interest rate levels at 0,5%.

The Swedish central bank was the first to initiate negative interest rates in Europe, which stood at -0,5% in February 2016. At full employment levels and with healthy growth, Sweden is tracking developments in the Eurozone, but the UK is making its own way.

Denmark is holding on to negative interest rates, gradually reaching ground zero, despite buoyant growth  projections and near full employment levels.

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