"Highest Speed in 30 Years"...The Fear of R Realized in Big Step UK

[Asia Economy Reporter Yujin Cho] The UK is expected to implement another ‘big step’ (a 0.5 percentage point increase in the base interest rate) next month due to wage-driven inflation. This outlook is based on the analysis that the high-wage structure, solidified by supply-demand imbalances following Brexit (the UK’s withdrawal from the European Union), is further fueling inflationary pressures. Caught between high inflation and the looming fear of an ‘R (Recession),’ the Bank of England (BOE) faces increasingly difficult decisions.

On the 12th (local time), Bloomberg cited economic experts saying that with inflation and wage growth continuing, it will be difficult for the BOE to narrow the pace of rate hikes next month. The UK Consumer Price Index (CPI) inflation rate peaked at 11.1% in October last year and fell to 10.5% in December. However, the January figure to be released on the 15th is still expected to remain in double digits. Bloomberg forecasted the UK’s January CPI inflation rate at 10.1%.

According to a Bloomberg survey, the average wage growth excluding bonuses in the fourth quarter of last year was 6.5%, continuing an upward trend from the previous quarter (6.4%). Since Brexit, the UK has experienced a severe labor market supply-demand imbalance due to a decrease in the number of immigrants.

[Image source=Reuters Yonhap News]

Experts pointed out that excluding the COVID-19 pandemic lockdown period, which was distorted by government support, wage growth is occurring at the fastest pace in history. Sonali Punhani, Chief UK Economist at Credit Suisse, said, "High wages are further fueling inflationary pressures," adding, "This is also putting pressure on the BOE’s interest rate hike path."

The BOE has identified wages as a key factor in setting monetary policy this year. This is clearly reflected in the remarks of BOE Governor Andrew Bailey, who stated, "Labor shortages are increasing wage pressures and fostering a vicious cycle of inflation."

(If too long, cut this paragraph) However, at the BOE’s Monetary Policy Committee (MPC) meeting held on the 2nd, opinions were divided on measures to curb wage-driven inflation. Jonathan Haskel, an external MPC member, took a hawkish stance, saying, "Uncertainty about the persistence of inflation in economic theory requires a stronger response." Some members argued that the impact of rate hikes on the economy is limited and suggested considering rate cuts.

Wage-driven inflation and the resulting high-intensity tightening policy are narrowing the UK’s options to avoid a recession. Experts predict that the UK will not escape recession this year or next. The International Monetary Fund (IMF) forecasted in its World Economic Outlook (WEO) report released at the end of last month that the UK economy will contract by -0.6% this year, making it the only G7 country expected to experience negative growth. This is a 0.9 percentage point downward revision from the figure announced in October last year.

(If too long, cut this paragraph) Concerns have even been raised that the UK, which has shown relatively sluggish recovery compared to other European countries due to the pandemic and energy crisis, may face the longest recession since the financial crisis. The IMF noted that due to high interest rates, consumption, which drives the UK economy, is unlikely to improve soon, and businesses are also insufficient to lead growth.

The UK’s base interest rate has risen from 0.1% in December 2021 to 4.0% over 14 months. This is the highest level since the global financial crisis in 2008. The pace of tightening is also the fastest in 31 years since 1992. At the meeting on the 2nd, the BOE said further rate hikes are necessary but omitted the phrase ‘forcefully’ regarding the pace of increases.

This content was produced with the assistance of AI translation services.