The Bank of England’s chief economist Huw Pill still sees the need for a “significant” base rate rise in November, despite the worsening economic outlook.
In a speech at the Scottish Council for Development and Industry in Glasgow, he said: “At present, I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks. But I will see when we get to November how events have evolved in the meantime.”
Pill also said that new independent forecasts from the Office for Budget Responsibility, which will be released alongside the chancellor’s budget plans on October 31, 2022, will “bolster the credibility of the process, thereby helping to add stability in what is a volatile environment at present.”
The lack of an independent assessment by the fiscal watchdog was a key reason why Kwasi Kwarteng’s recent mini-budget of tax cuts sparked turmoil on financial markets, and in the mortgage market.
Earlier today, the BoE also warned that the global economic outlook had worsened significantly since July, and said rising interest rates will pose similar problems for households as at that time of the 2008 financial crisis.
In its latest quarterly report the Bank said if interest rates rise to 6% as markets expect, the proportion of households facing high debt servicing costs will reach levels not seen before the global financial crisis.
The Boe said: “Assuming rates follow this market-implied path, the share of households with high cost-of-living adjusted mortgage debt-servicing ratios would increase by end-2023 to around the peak levels reached ahead of the global financial crisis.”
However, it pointed out that, households are in a stronger position than in the run-up to the global financial crisis so UK banks are less exposed to household vulnerabilities, adding the UK banking sector is also much better capitalised.
“Nevertheless, it will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates” the Bank said.