The Bank of England (BoE) raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25 per cent on Thursday, and gave a new warning that borrowing costs were likely to stay high for some time.
Unlike the US Federal Reserve or the European Central Bank – which also both raised rates by a quarter-point last week – the BoE’s Monetary Policy Committee gave little suggestion that rate hikes were about to end as it battles high inflation.
“The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target,” the BoE said in new guidance about the outlook for rates.
“Some of the risks of more persistent inflationary pressures may have begun to crystallise,” it added.
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British inflation hit a 41-year high of 11.1 per cent last year and has fallen more slowly than elsewhere, dropping to 7.9 per cent in June, the highest of any major economy.
Economists polled by Reuters last week forecast BoE rates would peak at 5.75 per cent later this year. The BoE's own forecasts were based on recent market assumptions – which have now eased somewhat – that rates would peak at over 6 per cent and average nearly 5.5 per cent over the next three years.
“Inflation hits the least well-off hardest and we need to make absolutely sure that it falls all the way back to the 2 per cent target,” Governor Andrew Bailey said.
Policymakers voted 6-3 for the increase, but were split three ways on the decision for the first time this year. Two MPC members – Catherine Mann and Jonathan Haskel – voted for a half-point increase this month, while Swati Dhingra voted for no change, as she has all this year, warning of overtightening.
Markets had seen a roughly one-in-three chance of a bigger increase to 5.5 per cent, which would have repeated June's outsize rise.
The BoE forecast inflation would fall to 4.9 per cent by the end of this year – a faster decline than it had predicted in May.
This will relieve prime minister Rishi Sunak, who pledged in January to halve inflation this year, a goal which had looked challenging.
However, the BoE forecasts inflation will be slightly slower to fall from late next year. Inflation does not return to its 2 per cent target until the second quarter of 2025, three months later than it forecast in May.
The BoE said it was incorporating more of the upside risks to inflation which the MPC saw in May into its central or “modal” forecast, despite a bigger-than-expected fall in inflation in June.
Services price inflation – which the BoE said offered a signal on longer-term price trends – was projected to stay high, and wage growth at the end of this year was expected to be 6 per cent, up from May's forecast of 5 per cent.
Wage rises had been a bigger driver of high inflation than companies' profit margins, the BoE said.
The BoE, which noted the economy’s recent “surprising resilience”, changed its growth forecasts little from three months ago, with the economy due to expand a meagre 0.5 per cent in 2023 and 2024, and just 0.25 per cent in 2025.
The jobless rate is predicted to rise to 4.8 per cent by late 2024, up from a forecast of 4.4 per cent in May and 4.0 per cent in the latest data.
Mortgage costs have hit their highest since 2008, weighing on house-building. The BoE forecast housing investment would fall 5.75 per cent this year and 6.25 per cent in 2024.
– Reuters
