The Bank of England (BoE) raised its base rate by a further 0.25 percent on Aug. 3, to 5.25 percent.
It’s the 14th consecutive time that the central bank has ramped up its overnight lending rate, which is now at its highest level since April 2008.
The BoE’s Monetary Policy Committee (MPC), which sets the interest rate, is expected to revise the figure again in November.
The bank’s governor, Andrew Bailey, declined to predict future rates, telling reporters at a news conference that it’s “far too soon to speculate” on when the bank may move on interest rates again.
The BoE, whose task is pulling inflation back to its 2 percent target, said the latest indicators have painted a “mixed” picture, although higher-than-expected wage growth suggested the bank’s worry of a wage-price spiral “may have begun to crystallise.”
According to meeting minutes, six of the eight MPC members judged a 0.25 interest rate hike was about right, but only five voted for the change.
One member preferred to leave the rate at 5 percent over concerns that “increasingly restrictive” lending rates may lead to economic decline and prompt the bank to perform a sharp U-turn.
The other two members believed a bigger increase of 0.5 percent was required to beat inflationary pressure.
The BoE’s modal projection suggests CPI inflation will fall further to 5 percent by the end of the year and return to the 2 percent target by the second quarter in 2025.
Mixed Picture
The UK’s annual inflation rate has fallen to 7.9 percent in June, down from 8.7 percent in May and 11.1 percent peak in October last year.It’s largely down to energy prices falling back after it skyrocketed following the end of lockdowns and Russia’s invasion of Ukraine.
Mr. Bailey said the bank’s forecast suggests energy price’s pressure on inflation may be “turning negative ... in the coming months.”
Food inflation has recently begun to ease but remains elevated. According to Mr. Bailey, the bank expects the prices to “come down gradually over the rest of this year.”
“Evidence collected by the bank’s regional agents suggests that a moderation in food import prices has been passed through the supply chain to consumer prices,” he said.
Bailey added that the bank expects a gradual ease in core inflation because of the time it takes for fallen energy prices to filter through the supply chain, but he also noted there are evidence the process may happen faster than the bank’s projection.
Inflation in service prices in June was at 7.2 percent, higher than the BoE’s previous projection.
Noting that the figure may have been pushed up by “volatile” seasonal factors such as holidays, Mr. Bailey said high prices in the service sector could be an indicator that inflation may persist for longer.
While the labour market remains tight, there have been some signs of loosening.
Mr. Bailey said that the MPC will “continue to monitor closely indications of persistence in inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions, and the behaviour of wage growth and service price inflation,” and raise bank rate further if it’s deemed necessary.
“We will ensure that bank rate is sufficiently restrictive for sufficiently long to turn inflation to the 2 percent target sustainably in the medium term, in line with the remit,” he said.
Quizzed about what rate the bank believes is not “restrictive,” deputy governor Ben Broadbent said he has “sympathy” to the view that it’s very difficult to judge in real time what the neutral rate might be.
“I’m not gonna give you some precise number because I don’t know precisely what it is. I don’t think it’s possible to be precise,” he said.
“What we can say is we think we’re seeing evidence that the rate of interest is above the neutral rate, without saying precisely what that is because we’re beginning to see an effect on demand,” he said.
Mr. Broadbent also disputed that real income is still falling, saying the “enormous or mighty rises in import prices” caused by energy price hikes are now “subsiding.”
