British Chamber recently released the results of the last Quarterly Economic Survey of 2021. The results showed that economic recovery weakened in Q4 and many businesses are becoming increasingly concerned with inflation as they look to raise prices as a result of cost pressures.
Since the release of the results, we spoke with Costas Milas, Professor of Finance at the University of Liverpool Management School, who provided their reaction to the latest QES results:
‘The latest quarterly economic survey suggests that prices are rising fast. Inflation is already 2.5 times higher than the Bank of England’s inflation target (of 2 per cent) which puts (additional) pressure on the Bank’s policy-makers to raise interest rates. Some argue that further interest rate rises are not going to put a “lid” on inflation because most of the current inflation pressures are due to supply-side bottlenecks. The problem with this argument is twofold. First, the Bank of England has a mandate to bring inflation back to the 2% target whether inflation is supply or demand driven. Second, even if we are willing to assume that supply-side considerations are to blame, there is a very plausible argument that workers will demand and get higher wages (in response to the rising cost of living) which, in turn, will fuel a price-wage spiral. All these suggest that the Bank of England will proceed with further interest rate increases sooner than later.
Financial markets currently expect interest rates to reach 1% by autumn 2022. Whether the Bank of England decides to go that ‘fast’ is debatable not least because the Bank’s policy-makers have repeatedly wrong-footed financial markets in the past. As I explain in recent work of mine, interest rates move up or down depending on inflationary pressures, output growth and the impact of the Covid virus on the economy. As things stand, inflationary pressures are on the rise. Output growth, because of considerations related to the “Omicron” variant and working from home guidance has taken a slight hit. Nevertheless, the UK economy has learnt how to live with successive lockdowns and the virus. In other words, despite the latest setback from the virus, consumers and businesses should prepare themselves for further interest rate increases.’