The Bank of England (BoE) has raised interest rates from 4.25 percent to 4.5 percent marking their highest level in almost 15 years.
It’s the bank’s 12th consecutive rate hike and a peak since October 2008.
Governor Andrew Bailey said the BoE is now forecasting “modest but positive growth” instead of a “shallow but long recession” predicted six months ago.
He also signalled that further increases will come if there is a wage-price spiral.
It comes as the UK Consumer Prices Index (CPI) inflation remained above 10 percent in March, 0.8 percentage points higher than the BoE’s prediction in February. Food prices were particularly high, 19.2 percent higher than the same month last year.
Seven of the Monetary Policy Committee (MPC) members voted to increase the bank rate to 4.5 percent, owing to “repeated surprises about the resilience of demand” and concerns over a potential wage-price spiral.
Two members preferred to maintain the rate at 4.35 percent as the CPI inflation rate was expected to come down and the effect of previous rate increases is still feeding through the economy.
Speaking to reporters at a press conference, Bailey said the inflation has remained “too high” compared to its target of 2 percent.
But the governor said he expects the headline inflation rate to fall “quite sharply over the coming months, beginning with the April number” as last year’s energy price hike began to drop out of the annual calculations.
A report published by the BoE said modelling suggests CPI would fall to 8.4 percent in April before declining further to around 7 percent in July.
Bailey also said that the food price inflation is expected to start easing, but the bank is “less sure about this on timing.”
Evidence collected by the bank’s agents suggested food producers are expecting production costs would moderate, Bailey said.
“While this may take longer than we previously thought, we should expect this to feed through to consumer food inflation over the coming year.”
But the bank is less certain about how wage increases would affect the core inflation rate amid a tight labour market and industrial strikes.
While there have been signs that the labour market is “loosening a little,” the MPC is “paying particular attention to indicators of inflation persistence, including labour market tightness, and wage growth and services inflation,” Bailey said.
Moderate Growth
The BoE said the UK’s GDP is expected to be flat over the first half of the year, but is projected to “grow at a moderate pace” unless a further shock emerges.A recession is normally defined as a decline in GDP for two or more consecutive quarters.
In February, the bank forecast a 0.7 percent decline in the UK’s GDP in the second quarter. It’s now revised to 0 percent.
According to the BoE’s projections, the UK’s economy will grow by 0.9 percent in the second quarter next year, instead of a 0.3 percent decline shown in February’s forecast. The GDP is expected to grow by a further 0.7 percent in 2025 and 1.1 percent in 2026.
The projections are based on a market-implied path for bank rate that peaks at around 4.75 percent in the last quarter this year and falls back to just over 3.5 percent before the forecast period.
Anna Leach, deputy chief economist at the Confederation of British Industry (CBI), said the BoE is “rightly concerned” that higher inflation could become “entrenched.”
But Trevor Williams, shadow monetary policy committee chair at free market think tank the Institute of Economic Affairs, said the bank is running “a significant risk of overcorrecting.”
The Liberal Democrats have called on Chancellor Jeremy Hunt to resign if he fails to meet his inflation target and help lower food bills.
“This is a hammer blow to struggling families who simply can’t balance the books with these endless price rises,” the party’s treasury spokeswoman Sarah Olney said.
“With mortgages and inflation remaining at sky-high levels, Jeremy Hunt is frankly failing at his job. He was set one main goal, which was to bring down prices, yet today confirms he is nowhere near achieving that.
Olney accused Hunt of refusing to act upon “the deadly rise in food prices” and called for him to resign if inflation remains high.
“If Jeremy Hunt doesn’t meet his self-imposed inflation target and bring down food bills soon then he must go. Families and pensioners just want an end to the cost-of-living crisis, yet Jeremy Hunt looks the like yet another chancellor who isn’t up to the task,” she said.
Hunt backed the bank’s effort to rein in the runaway inflation.
“Although it is good news that the Bank of England is no longer forecasting a recession, today’s interest rate rise will obviously be very disappointing for families with mortgages,” he said.
“But unless we tackle rising prices, the cost-of-living crisis will only carry on—which is why we need to be resolute in sticking to our plan to halve inflation by the end of the year.”
The BoE’s new interest rate hike comes in line with similar moves from other central banks. The U.S. Federal Reserve last week hiked its base rate to 5.08 percent while the European Central Bank increased its rate to 3.25 percent.
