The Bank of England raised interest rates by a quarter of a percentage point to 4.5% as it warned it would not hit its inflation target until 2025.
A seven-to-two majority in the central bank’s monetary policy committee said the hike was needed to bring inflation under control as they took rates to the highest level since 2008.
The BoE upgraded its short-term inflation forecast as it admitted it had previously underestimated the strength and persistence of food price increases.
Instead of inflation falling below its 2% target within a year, as it previously predicted, the BoE now thinks it won’t hit the target until early 2025, after the last date of the next general election.
He now expects inflation to rise from the current rate of 10.1% to 5.1% in the fourth quarter of the year, instead of his previous forecast of 3.9%. Any further deterioration in the inflation outlook would deprive Prime Minister Rishi Sunak of his promise to halve inflation by the end of the year.
However, the bank 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.
The BoE believes that food price inflation will no longer be driving global price increases a year from now. But he now expects the generally improving economic outlook to mean inflation will be above target going forward.
Financial markets expect further increases in the cost of borrowing, with rates peaking at nearly 5%.
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 growth had increased not only due to lower energy prices, but also 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 growth rates struggling to exceed 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 interest rate hikes from 0.1% in December 2021 to 4.5% have yet to be felt by households, the BoE said in its monetary policy report, with only a third of the total impact in place.
MPC members voting to keep rates at 4.25% Swati Dhingra and Silvana Tenreyro said the delayed effect of previous hikes was yet to come. They argued that this risked driving inflation too low, making it necessary to lower interest rates in the future.
—————————————————-
Source link