The Bank of England building, in London, on Aug. 4, 2022.Maja Smiejkowska/Reuters
The Bank of England 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 U.S. 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 [the] Bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2-per-cent target,” the BoE said in fresh guidance about the outlook for borrowing costs.
“Some of the risks of more persistent inflationary pressures may have begun to crystallize,” it added.
Governor Andrew Bailey stressed that message to reporters after the announcement, even as the economy looked set to grow only minimally over the coming years.
“I don’t think it is time to, sort of, declare it’s all over and we’re, sort of, sitting where we are for the moment,” he said.
“We have to remain evidence-driven. We’ve continued to use language which we’ve used before, which is to say, if we get more evidence of more persistent inflation, then we will have to react to that.”
Mr. Bailey also said it was far too soon to speculate about the timing of any rate cuts.
Sterling briefly dipped after the data and financial markets moved to price in a roughly two-thirds chance of another quarter-point interest-rate rise to 5.5 per cent in September.
Mr. Bailey said the pace of pay growth was “materially above” the BoE’s previous forecasts which suggested it would take longer for the knock-on effects of high inflation to fade than it did for them to appear.
Wage rises had been a bigger driver of high inflation than companies’ profit margins, the BoE said.
British inflation hit a 41-year high of 11.1 per cent last year and has fallen more slowly than elsewhere, standing at 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.
“One weak data point will not be enough for the Bank to be satisfied that inflation is now on a sustainable trajectory. We expect at least one more 25-bps rate hike in September,” said Thomas Pugh, an economist with accountancy firm RSM UK.
Policy-makers 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 bigger, half-point increase, while Swati Dhingra again voted for no change, warning of the risk of smothering the economy.
Markets had seen a roughly one-in-three chance of a bigger increase to 5.5 per cent, which would have repeated June’s big 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 be a relief for Prime Minister Rishi Sunak, who pledged in January to halve inflation this year, a goal which had looked challenging.
“If we stick to the plan, the Bank forecasts inflation will be below 3 per cent in a year’s time without the economy falling into a recession,” finance minister Jeremy Hunt said after the BoE’s announcement.
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.
The BoE noted the economy’s recent “surprising resilience” but barely changed its growth forecasts 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 2025, 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.