The Bank of England raised interest rates by a quarter of a percentage point to 4.5% on Thursday and warned it would not hit its inflation target until 2025.
A seven-to-two majority in the central bank’s monetary policy committee took rates to their highest level since 2008 as the BoE admitted it had underestimated the strength and persistence of price increases food.
Instead of inflation falling below its target of 2% within a year, which the BoE had forecast, the central bank now thinks it will not reach the target until early 2025, after the last date of the next general election. .
THE BoE expects consumer price inflation to rise from the current level of 10.1% to 5.1% in the fourth quarter of 2023, instead of its previous forecast of 3.9%.
Any further deterioration in the inflation outlook would deprive British Prime Minister Rishi Sunak of his promise to halve inflation by the end of the year.
“We must stay the course to ensure inflation falls to our target,” BoE Governor Andrew Bailey said. “We expect inflation to decline rapidly this year.”
The BoE now thinks the UK economy will avoid a recession relatively comfortably, predicting that by mid-2026 gross domestic product will be 2.25% higher than it forecast in February.
Jeremy Hunt, Chancellor, said it was “good news that the Bank of England is no longer forecasting a recession”.
But he added that the rise in interest rates “will obviously be very disappointing for families with mortgages”, as he reaffirmed the government’s aim of halving inflation by the end of the year. .
Rachel Reeves, shadow chancellor, said families and businesses would be wracked with anxiety following the latest rate hike.
“The Prime Minister should take his fingers out of his ears and admit personal responsibility for a Tory mortgage crisis that is making so much worse,” she added.
Emphasizing the concern aroused rising food pricesJohn Glen, Chief Secretary to the Treasury, has called a meeting with supermarket bosses.
Government insiders said ministers did not intend to slam bosses over claims of price gouging by companies, but rather discuss the drivers of grocery inflation.
The BoE thinks that the rise in food prices will no longer be the driver of headline inflation in a year’s time. However, she expects the general improvement in the economic outlook to mean that inflation will stay above the BoE’s target for longer than expected.
Financial markets are anticipating further increases in the cost of borrowing, with interest rates peaking at nearly 5% by the end of the year.
The BoE’s forecast did not push against those expectations and the MPC warned that “if there were to be evidence of a [inflationary] pressure, then a further tightening of monetary policy would be necessary”.
He said the outlook for economic growth had increased not only due to lower energy prices, but also due to stronger consumer and business confidence and government spending increases from the March budget. .
BoE officials pointed out that growth forecasts were still weak, with annual rates struggling to rise above 1% over the next three years, while unemployment would rise slightly from the current 3.8% to 4, 5% by 2026.
The main effects of the interest rate hike from 0.1% in December 2021 to 4.5% today have yet to be felt by households, the BoE said.
MPC members voting to keep rates at 4.25%, Swati Dhingra and Silvana Tenreyro, said the delayed effect of previous monetary tightening was yet to come and risked pushing inflation too low.