The Bank of England hiked interest rates by half a percentage point, indicating that further hikes will be required if symptoms of an inflationary spiral persist.
The increase to 4% was supported by seven of the UK central bank’s nine-member Monetary Policy Committee, while two voted against it. According to the majority, the economy’s pricing pressures are being fueled by high wage growth and an enduring labour shortage.
The move represented the tenth hike since the BOE began raising interest rates in December 2021, raising the main rate to its highest level since 2008.
The economy is already in recession, according to officials led by Governor Andrew Bailey, although the dip will be shorter and weaker than they predicted in November. The risks to inflation remain “substantially weighted to the upside.” This year will see record pay settlements, according to the committee.
The BOE forecasted a 1% drop in gross domestic product over the next five quarters. This would put Prime Minister Rishi Sunak’s administration under pressure to hold an election by the beginning of 2025. The economy will not recover to pre-pandemic levels of output until at least 2026, according to the BOE, and 500,000 more people will be laid off.
The BOE’s forecast shrinkage is still less than the 2.9% drop over eight quarters predicted in November.
Despite the bleak background, the BOE appeared to confirm the market’s expectation that interest rates will peak at roughly 4.5% in the coming months. The panel warned that “if there were to be evidence of more persistent pressure, then further tightening in monetary policy would be required.”
The market currently anticipates rate cuts next year.The BOE abandoned its advice that it would respond “forcefully” if required, indicating that the end of the rate-hike cycle is close.
The MPC’s breadth of opinions underscored the challenge of tackling inflation, which is reaching a 40-year high, while also coping with a challenging economic outlook.
Silvana Tenreyro and Swati Dhingra voted to keep prices unchanged, claiming that the impact of previous hikes has yet to be seen fully. Catherine Mann, who previously voted for a 75-basis-point increase, now joins Bailey and the majority of MPC members in asking for a 50-basis-point increase.
The Bank of England cut its forecast for the economy’s supply potential, citing the impact of Britain’s leaving the European Union on trade and the fact that many people have fallen out of the labour market.
Consumer price inflation will be below the 2% objective in two years if the market rate path is followed. However, authorities warned against taking the projection too seriously. “An inflation forecast that took into account these upside risks was judged to be much closer to the 2% target,” the committee said.
The Bank of England reduced its estimate of potential production, the economy’s growth speed limit, to 0.7% for the next three years, down from 0.9% in November and 1.5% in its previous “supply stock take” 15 months ago. Prior to the financial crisis, the trend rate was 2.5%, and it was about 1.5% in the decade leading up to the pandemic.
The bank attributed the decline to a series of economic shocks, including Brexit, the pandemic, and rising energy costs. It specifically mentioned a labour shortage, sluggish corporate investment, and low productivity.
The economic cost of Brexit has not changed, but the Bank of England now anticipates that more of the damage will be seen immediately. It maintained that “the level of productivity would be roughly 3.25% lower in the long run” as a result of the UK’s withdrawal from the EU free-trade zone.
