© Reuters. FILE PHOTO: People walk past the Bank of England in the City of London financial district in London, Britain May 11, 2023. REUTERS/Henry Nicholls
By David Milliken and Andy Bruce
LONDON (Reuters) – The Bank of England raised its key rate by a quarter of a percentage point to 4.5% on Thursday and Governor Andrew Bailey said Britain’s central bank would “stay the course” as it seeks to rein in the fastest inflation of any major economy.
The BoE no longer forecasts a recession after making the biggest improvement to its growth projections since it first released its forecast in 1997.
But he now expects inflation – which remained above single digits in March – to decline more slowly than he had hoped, mainly due to unexpected and persistent increases in food prices. He also saw stronger wage growth than he previously thought.
“We need to stay the course to make sure inflation comes back down to the 2% target,” Bailey said at the start of a press conference before stressing that the BoE was not sending any signals about its next steps. movements, which would depend on the data.
Policymakers voted 7-2 for the May increase, in line with economists’ expectations in the Reuters poll, with Monetary Policy Committee members Silvana Tenreyro and Swati Dhingra again opposing further tightening.
GRAPHIC: Bank of England raises rates for 12th consecutive time https://www.Reuters.com/graphics/BRITAIN-BOE/dwpkdnjgzvm/chart.png
A Reuters poll last week showed most economists were expecting a 12th consecutive quarter-point rise in May – taking borrowing costs to their highest level since 2008 – before a period of suspension.
But investors bet on further upside and shortly after Thursday’s decision they were expecting a peak of almost 5% this fall.
“If there were to be evidence of more persistent pressures, further monetary policy tightening would be required,” the BoE said, maintaining its message from the start of the year.
The pound gained almost half a cent against the US dollar, rising above $1.26, as UK government bond yields rose before stabilizing around their pre-storm levels. announcement.
Paul Dales, chief UK economist at Capital Economics, said he thought rates were likely to peak, but could stay there until 2024 before being cut.
“We suspect that some stickiness in wage growth and domestic inflation will mean that the holding phase of the cycle will be quite long and will last until the first half of next year (on the other hand, we believe that the US Fed will cut rates this year),” Dales said.
Luke Bartholomew, abrn’s senior economist, said the upcoming inflation data releases – starting May 24 with figures for April – could be “a source of market volatility, particularly around currencies, the sterling now factoring in more aggressive action by the BoE here compared to other central banks”.
The BoE was the first major central bank to start raising borrowing costs in December 2021, but was criticized by some for not acting aggressively enough as inflation headed for a four-decade high of 11.1% reached in October.
Last week, the US Federal Reserve and the European Central Bank both raised their benchmark borrowing rates by 25 basis points. While Fed Chairman Jerome Powell hinted at a pause, ECB President Christine Lagarde said it was too early to stop.
GRAPH: The race to raise tariffs https://www.Reuters.com/graphics/GLOBAL-MARKETS/myvmowjmxvr/chart.png
Britain’s high inflation problem stems in large part from its reliance on imports for power generation, leaving it particularly exposed to soaring energy prices after Ukraine invaded Ukraine. Russia last year.
Energy prices have now fallen sharply and the central bank expects inflation to fall to 5.1% by the end of the year from 10.1% in March. But this is less of a decline than the drop to 3.9% it forecast in February and the BoE expects inflation not to return to its 2% target until early 2025.
Higher forecasts for food prices added about 1 percentage point to future inflation from February, the BoE said.
Most BoE policymakers saw “significant” upside risks to this inflation forecast and inflation is not expected to fall significantly below its target at any time in the next few years, even if the rate of inflation increases. discount increases by another quarter point or more.
WAGE GROWTH PRESSURES
The BoE is concerned that recent strong wage growth could turn into a lasting problem for the economy, and on Thursday it forecast much stronger wage growth and lower unemployment than three months ago.
“Wage rates could stabilize at rates above those consistent with the 2% inflation target on a sustainable basis over the medium term,” the central bank said.
BoE chief economist Huw Pill said last month that British businesses and individuals had to accept that their incomes had fallen in inflation-adjusted terms, sparking criticism from unions and some former government officials. BoE rate setting.
The BoE forecast the economy to expand by 0.25% this year – compared to its February forecast of a contraction of 0.5%.
Cheaper energy, fiscal stimulus and improving business and consumer confidence mean the BoE is forecasting no more recession this year and expects the economy to be 2.25% bigger in three years than before.
The government’s budget announced in March is expected to boost economic output by about 0.5% over the next few years.
The BoE estimated that around a third of past interest rate hikes had passed through to households and businesses, a slower transmission than in previous tightening cycles due to a higher share of homeowners having fixed rate mortgages.
Bailey said the extent of the impact on the economy of previous BoE rate hikes was a “hot topic of debate” among MPC members.