2023-05-11 19:04:35
The Bank of England on Thursday raised interest rates by a quarter of a percentage point to 4.5 per cent, and warned it would not hit its inflation target until 2025.
A seven to two majority on the central bank’s Monetary Policy Committee took rates to the highest level since 2008, as the BoE admitted it had underestimated the strength and persistence of food price rises.
Instead of inflation falling below its 2 per cent target within a year, which the BoE had forecast, the central bank now thinks it will only hit the goal at the start of 2025, after the latest date of the next general election.
The BoE expects consumer price inflation to fall from the current level of 10.1 per cent to 5.1 per cent in the fourth quarter of 2023, instead of its previous forecast of 3.9 per cent.
Any further deterioration in the inflation outlook would leave Rishi Sunak, UK prime minister, missing his pledge to halve inflation by the end of the year.
“We have to stay the course to ensure inflation falls all the way back to our target,” said BoE governor Andrew Bailey. “We expect inflation to fall quickly this year.”
The BoE now thinks the UK economy will avoid a recession relatively comfortably, forecasting that by mid-2026 gross domestic product will be 2.25 per cent higher than it expected in February.
Jeremy Hunt, chancellor, said it was “good news that the Bank of England is no longer forecasting recession”.
But he added the interest rate rise “will obviously be very disappointing for families with mortgages”, as he reaffirmed the government’s goal to halve inflation by year-end.
Rachel Reeves, shadow chancellor, said families and businesses would be wracked with anxiety following the latest rate rise.
“The prime minister should take his fingers out of his ears and admit his personal responsibility for a Tory mortgage crisis leaving so many worse off,” she added.
Underscoring the concern over food price rises, John Glen, chief secretary to the Treasury, called a meeting with supermarket bosses.
Government insiders said ministers did not intend to give bosses a dressing down over claims of price gouging by companies but rather discuss the drivers of grocery inflation.
The BoE thinks food price rises will no longer be driving headline inflation in a year’s time. However, it expects the general improvement in the economic outlook will mean that inflation will stay above the BoE’s target for longer than expected.
Financial markets anticipate more rises in the cost of borrowing, with interest rates peaking close to 5 per cent by the end of the year.
The BoE forecasts did not push against such expectations and the MPC warned that “if there were to be evidence of more persistent [inflationary] pressure, then further tightening in monetary policy would be required”.
It said economic growth prospects had increased not just because of lower energy prices but also because of more robust consumer and corporate confidence and the March Budget’s public spending increases.
BoE officials stressed the growth forecast was still weak with annual rates struggling to exceed 1 per cent over the next three years, while unemployment would edge higher from 3.8 per cent at present to 4.5 per cent by 2026.
The main effects of the rises in interest rates from 0.1 per cent in December 2021 to 4.5 per cent now have not yet been felt by households, the BoE said.
The MPC members voting to hold rates at 4.25 per cent, Swati Dhingra and Silvana Tenreyro, said the delayed effect of previous monetary tightening was still to come and this was likely to push inflation down too far.
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