New data on low unemployment levels in the UK has recently been released, sparking concerns that interest rates could hit 4%. The Bank of England has hiked interest rates rapidly since December last year with a series of 0.25% increases followed by a 0.5% hike in August, taking the base rate to 1.75%.
Many economists have predicted that the rate hike in September, which takes place next week rather than this week as a mark of respect for the Queen, will also be 0.5%. However, some believe that it could be as high as 0.75%. The likelihood of a more considerable hike next week has increased further following the data showing that the jobless rate fell from 3.8% to 3.6% in the three months to July.
Unemployment at lowest level in decades
While inflation has soared to its highest level in decades, UK unemployment has fallen to its lowest since 1974. Economists have noted a cooling in demand for employees due to a drop in job vacancies, but redundancies are said to be low.
There is also speculation over whether soaring energy prices could impact staffing plans for businesses across the UK.
A report published by Trading Economics reads: “The jobless rate in the UK fell to 3.6% in the three months to July of 2022, the lowest since 1974, from 3.8% in the previous period and compared to market forecasts of 3.8% as the number of people who are no longer looking for work increased. The so-called inactivity rate rose to 21.7%, the highest since 2017 driven by students or long-term sick. Meanwhile, the employment rate decreased by 0.2 percentage points to 75.4% and is still below pandemic levels, mainly due to a fall in part-time employment.”
Further pressure on the central bank
The tighter labour market is putting further pressure on the central bank, which is already struggling to try and bring inflation down. Moreover, worker shortages are affecting many industries, leading to speculation of even more aggressive monetary policy tightening in the coming months.
Officials from the Bank of America have now predicted that the UK interest rate could increase to 4% over the course of 2022 and 2023. This is an upward revision from its previous prediction of 3.25%. The US bank has predicted an increase of 0.5% next week at the Monetary Policy Committee meeting, followed by half-point hikes in November and December. It has further predicted quarter-point increases in February, May, and August 2023, which would take the base rate to 4%. In addition, the bank believes that there will be no rate cuts until the end of 2024.
Officials from the Bank of America said: “By lowering peak inflation we see the government’s energy price cap allowing the BoE to avoid increasing the pace of hikes. But more fiscal stimulus means the BoE will have to hike more overall. Looser fiscal means tighter monetary (policy).” The Bank of America also predicted that next week’s MPC meeting would see seven of the nine policymakers voting for a 0.5% increase and two members voting for either 0.25% or 0.75%.