LONDON — The bank of england On Thursday, it raised interest rates by 25 basis points and revised its economic projections to now rule out the possibility of a recession in the UK this year.
The Monetary Policy Committee voted 7 to 2 in favor of a quarter-point hike to raise the main policy rate from 4.25% to 4.5%, as the bank reiterated its commitment to contain a stubbornly high inflation.
THE The overall consumer price index increased by 10.1% per year in March, driven by still high food and energy bills. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, rose 5.7% in the 12 months to March, unchanged from February’s annual rise and reiterating the entrenchment risk that worries the bank.
The MPC no longer expects the UK economy to fall into recession this year, according to updated growth forecasts in its monetary policy report. UK GDP is now expected to be flat in the first half of this year, growing 0.9% to mid-2024 and 0.7% to mid-2025. The latest printout of the country’s GDP will be released on Friday.
So far, the economy has shown surprising resilience in ward off a widely anticipated recessionwith falling energy costs and fiscal stimulus announced in the government’s spring budget improve prospects.
The MPC now assesses that “the trajectory of demand is likely to be materially stronger than expected in the February report, although still subdued by historical standards.”
“There has been some positive news regarding the near-term outlook for global activity, with UK-weighted global GDP now expected to grow at a moderate pace throughout the forecast horizon,” the MPC said in its May monetary policy report.
“Risks remain but, absent a new shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent developments in the global banking sector.”
Inflation slower to fall
Inflation is expected to fall sharply from April, as sharp price increases following the large-scale Russian invasion of Ukraine are excluded from the annual comparison. The extension of the government’s energy price guarantee and further cuts in wholesale energy prices are also removing some inflationary pressures.
However, the MPC expects inflation to decline at a slower pace than predicted in the February report, falling to 5.1% by the end of this year, from a previous estimate of 3.9%. It is still expected to fall “significantly below the 2% target” to just above 1% at the two- and three-year time horizons.
“The Committee continues to judge that the risks surrounding the inflation forecast are clearly on the upside, reflecting the possibility that the second-round effects of external cost shocks on domestic wage and price inflation will put more longer to subside than they took to emerge,” the MPC said.
“If there were to be evidence of more persistent pressures, further tightening of monetary policy would be required.”
Focus on what comes next
Compared to the US Federal Reserve’s hint of a pause in rate hikes last week, the Bank of England struck a markedly more hawkish tone on Thursday, with inflation stickier, meaning policymakers are facing a tricky call when enough is enough to raise rates.
Vivek Paul, chief UK investment strategist at the BlackRock Investment Institute, said investors’ focus in light of Thursday’s decision would not be on the 25 basis point rise, but on what’s coming. will then pass.
“We are in a new regime where central banks are faced with more acute trade-offs between maintaining growth and controlling inflation; in the case of the Bank of England, it is particularly acute,” he said. Paul said in an email Thursday.
Inflation since the February forecast has turned out to be more rigid than expected, and the Bank still forecasts lackluster growth for years to come, which will likely be exacerbated by higher interest rates for longer. There are also growing concerns about tight labor markets and the risk of a price-wage spiral.
“The recent comparative resilience in the growth picture could have two interpretations; one benign, suggesting that the economy is proving resilient to the effects of higher interest rates, or the other pessimistic suggesting that the full extent delayed damage has not yet occurred,” said Paul.
“This has implications for how the Bank manages the trade-off from here: continued resilience may ultimately mean more work for the BoE in terms of rate hikes; delayed damage yet to be seen may mean it is closer to stopping.”
Paul suggested the Bank could be forced to hold higher rates for longer, a view shared by Hussain Mehdi, macro and investment strategist at HSBC Asset Management.
“Against the backdrop of resilient economic activity, we believe there is a good chance that the Bank Rate will peak at 5% by the August meeting. Rate cuts are unlikely before a good part of 2024, when the Fed could be in cutback mode later this year,” Mehdi said.
“As rates push deeper into restrictive territory and credit conditions tighten, a policy-induced recession becomes all but inevitable.”