Bank of England Hikes Interest Rates Three Times Amid Inflation Concerns

People walk past the Bank of England during morning rush hour, in London, on July 29, 2021. Henry Nicholls/Reuters

The Bank of England (BoE) approved a third consecutive interest rate hike March 16 amid rising concerns about inflation.

It’s the first time since 1997 that the central bank has raised rates three times in a row.

“The (bank’s) MPC (Monetary Policy Committee) sets monetary policy to meet the 2 percent inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 16 March 2022, the MPC voted by a majority of 8-1 to increase Bank Rate by 0.25 percentage points, to 0.75 percent. One member preferred to maintain Bank Rate at 0.5 percent,” BoE said in a March 17 news release.

The 0.25 percentage point increase was “warranted” due to the current “tightness” in the labor market, continuing signs of “domestic cost and price pressures,” and the risk that such pressures will continue to remain, according to the report.

Further “modest tightening” in monetary policy might be needed in coming months, the bank stated. However, there are “risks on both sides of that judgment” depending on how inflation in the medium-term evolves, it admitted.

In its February Monetary Policy report, published prior to Russia’s invasion of Ukraine, the MPC predicted Consumer Price Index (CPI) inflation to peak at around 7.25 percent by April this year and for GDP to “slow to subdued rates” during the course of the year.

The upward pressures on inflation were predicted to dissipate over time, with CPI inflation expected to fall back to just above 2 percent in two years’ time, and below that level “by a greater margin” in three years.

However, the Ukraine invasion is likely to “accentuate” peak inflation as well as squeeze household incomes further, which will then adversely impact economic activity. The situation has led to “large increases” in the prices of energy and other commodities like food.

Over the coming months, global inflationary pressures will “strengthen,” which will negatively affect countries that are net energy importers, including the United Kingdom, the bank stated. The UK’s economic growth is “likely to slow,” based on the bank’s analysis.

“If sustained, the latest rise in energy futures prices means that Ofgem’s (Office of Gas and Electricity Markets) utility price caps could again be substantially higher when they are reset in October 2022. This could temporarily push CPI inflation around the end of this year above the level projected for April, which was previously expected to be the peak,” the bank said.

In January 2022, 12-month CPI inflation rose to 5.5 percent, up from December’s 5.4 percent. The BoE now expects inflation to increase to about 8 percent in the second quarter and “perhaps even higher” later during the year.

Considering the BoE’s higher inflation projections, a double-digit inflation rate might be in the cards, Paul Craig, portfolio manager at Quilter Investors, said to CNBC.

“The BoE had no choice but to keep raising rates. It is looking to build in some insurance now should there be a slowdown in economic growth or employment comes in worse than feared,” Craig said.

“With global risks and the Russia–Ukraine war having a significant economic impact, growth will be challenged and thus the Bank may need to reverse course later in the year.”