The UK’s central bank, the Bank of England, raised its key interest rate by 0.25% to 4.5% on Thursday, its 12th consecutive rate rise.
The increase takes UK borrowing costs to their highest since 2008 as the central bank seeks to curb the fastest inflation of any major economy.
The UK’s central bank no longer predicts recession after it revised up its growth forecasts from numbers released in February.
However, the bank also now expects inflation to be slower to fall than it had hoped, mostly due to persistent rises in food prices.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the central bank said.
The Bank of England said in its statement: “The Bank of England’s Monetary Policy Committee (MPC) … voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.5%. Two members preferred to maintain Bank Rate at 4.25% …
“There has been upside news to the near-term outlook for global activity, with UK-weighted world GDP now expected to grow at a moderate pace throughout the forecast period. Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments. Headline inflation has been falling in the United States and euro area, although core inflation measures remain elevated.
“UK GDP is expected to be flat over the first half of this year, although underlying output, excluding the estimated impact of strikes and an extra bank holiday, is projected to grow modestly. Economic activity has been less weak than expected in February, and the Committee now judges that the path of demand is likely to be materially stronger than expected in the February Report, albeit still subdued by historical standards.
“The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households.
“Although there are indications that the labour market has started to loosen, it is expected to remain tighter than in the February Report in the near term. The unemployment rate is now projected to remain below 4% until the end of 2024, before rising over the second half of the forecast period to around 4½%.
“CPI inflation was 10.2% in 2023 Q1, higher than expected at the time of the February and March MPC meetings, with the upside surprise concentrated in core goods and food prices. Although still elevated, nominal private sector wage growth and services CPI inflation have been close to expectations.
“CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison. In addition, the extension in the Spring Budget of the Energy Price Guarantee and declines in wholesale energy prices will both lower the contribution from household energy bills to CPI inflation.
“However, food price inflation is likely to fall back more slowly than previously expected. Alongside news in other goods prices, this explains why the Committee’s modal expectation for CPI inflation now falls back more slowly than in the February Report …
“The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances.
“The economy has been subject to a sequence of very large and overlapping shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.
“The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.5%, at this meeting. In doing so the MPC is continuing to address the risk of more persistent strength in domestic price and wage setting, as represented by the upward skew in the projected distribution for CPI inflation.
“The pace at which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. Uncertainties around the global financial and economic outlook remain elevated.
“The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
REACTION:
Victoria Scholar, Head of Investment, Interactive Investor: “Governor Andrew Bailey said ‘inflation remains too high’ and ‘we have to stay the course’ underscoring his reasoning behind today’s hike. He added that inflation is on course to halve by the end of this year.
“Financial markets anticipate further tightening from the Bank of England, with traders estimating that the Bank rate will hit around 4.88% in November, rising from 4.83% prior to the decision …
“The central bank is no longer forecasting a UK recession having upgraded its GDP forecasts. It expected economic growth of 0.25% in 2023 versus its February forecast for a contraction of 0.5%. It estimates unemployment to hit 3.8% in the fourth quarter, an improvement from its prior forecast for 4.3%.
“However it expects inflation to fall to 5.12% by the fourth quarter, higher than its previous estimate for 3.92% and wage growth is seen hitting 5% in the fourth quarter versus its February estimate for 4%.
“The Bank of England said food inflation is more persistent than forecast but Bailey commented ‘we do see signs that food price inflation will start to slow.”
Daniel Mahoney, UK Economist at Handelsbanken: “The BoE paints a much more sanguine picture for UK economic growth, dramatically improving its growth forecast for the UK compared to projections it set out in its February report. This reflects stronger than expected global growth, lower energy prices and fiscal support provided at the Spring Budget.
“The May report also argues that the impact of tightening credit conditions related to recent developments in the global bank sector will likely only have a small impact on GDP.
“Inflation, however, is expected to remain higher for longer compared to February’s projections. Expectations are for CPI inflation to end the year at just over 5% (versus projections of around 4% in February), with inflation only falling below 2% by 2025 …
“The speed and magnitude of monetary policy tightening since 2022 by Western Central Banks has been the highest observed for the past three decades. It is important to stress that previous rate hikes by the BoE will continue to transmit into the economy for some time to come: indeed, rate increases can take around six quarters to fully pass through.
“As monetary policy continues to transmit into the UK economy, we continue to expect growth effectively to flat line across 2023. The BoE has stated that if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.
“At this stage, we do not anticipate any further hikes in this cycle – especially as Quantitative Tightening will continue to gradually tighten monetary policy in the background – although we do continue to expect rates to remain at 4.5% for the remainder of 2023 given our expectation that services inflation is likely to be stubborn.”
Marcus Brookes, chief investment officer at Quilter Investors: “With the Bank of England raising interest rates yet again, we continue to ask ourselves ‘is this the end of the hiking cycle?’ Unfortunately for many households and businesses, we simply just do not know yet. While it appears in the US that they are ready to hit the pause button on interest rates, here in the UK we continue to face sky-high inflation, leaving the BoE with a tricky task of knowing when enough is enough on rates.
“However, the rate of inflation is still predicted to drop considerably from here as energy prices have since subsided following Russia’s invasion of Ukraine. This may give the BoE enough cover at its next meeting to press pause and give a little respite, before deciding on the next course of action. So far the UK economy has held up in the face of adversity and the forecast of recession has not yet come to fruition and the BoE is now expecting one not to happen – although for many it will have felt like one. Growth forecasts are picking up, although remain very weak, and given this backdrop, it is perhaps premature to look too far ahead and expect cuts later in the year.
“The economic environment does not necessarily paint a picture of recovery yet, and as the last three years have shown, things can change very quickly. Inflation is proving incredibly stubborn and the Monetary Policy Committee won’t want a policy misstep, so for as long as the economy can handle it, higher rates will remain in place until price rises are under control.”
Joshua Raymond, director at online investment platform XTB.com: “This latest rate hike was much expected by the market and had been effectively priced to the strength of the pound after recent data showed that UK inflation remained stubbornly high and had not subsided as fast as previously expected. As a result we did see a small jump in the GBPUSD exchange rate yet this move was not significant given the rate continues to trade close to 1-year highs.
“The market focus now turns to the future path of rate decisions and it’s here where there remains a big question. We already know wholesale energy prices have collapsed much faster than initially expected, with spot natural gas prices trading 50% lower than in February with equally sharp falls in futures prices. This should quicken the pace of inflation cooling in the coming months which could convince the BoE to refrain from a thirteenth consecutive hike.
“But it should also be noted that food price inflation in particular remains stubbornly high, whilst wage growth and strong employment might keep inflation temperatures warm. In today’s MPC decision, the committee admitted that it would have to hike rates even further if these conditions persist so that leaves the door ajar for more hikes.”
Lily Megson, policy director at My Pension Expert: “Another day, another blow to Britain’s savers. Even as interest rates continue to rise, any potential benefit savers might have experienced but a few years ago will likely be bulldozed by inflation – which has remained in double digits for almost a year.”
“Unsurprisingly, millions of Britons are worried. According to My Pension Expert’s own research from earlier this year, 44% of over-55s currently in work feel the cost-of-living crisis has rendered retirement impossible – a devastating figure, following their decades of hard work and diligent saving.
“In these challenging times, it is critical that Britons are empowered to secure their long-term financial aspirations. And this can only be achieved if they have access to the necessary support. The Government, regulators and the wider financial services sector must take steps to ensure education resources and independent financial advice are readily available. Access to such tools will ensure people can make well-informed financial choices and help them to achieve the retirement they want – and indeed deserve.”
Charles White Thomson, CEO at Saxo UK: “Managing inflation with the blunt weapon that are interest rates has always faced choreography issues, similar to breaking a nut with a sledgehammer. We are now in an economic danger zone, pincered between public enemy number one/ inflation, a 19% increase in food and non-alcoholic beverages which reaffirms the cost of living crisis, and a consumer saddled with outsized debt that was once cheap. The risk for further policy failure is real and the stakes are getting increasingly high.
“The conundrum facing the United Kingdom is more than just beating public enemy number one, or inflation, it is about defeating the high tax and low growth loop and the lovers of the status quo or managed decline. In an attempt to remove the politics and infighting, I prefer to continue referring to the UK as a PLC. My resounding conclusion from the UK PLC’s recent financial statement – or budget – is that the management team are in an unenviable position in that there is little wiggle room for large change.
“The UK PLC is effectively in a financial straitjacket with constraints including: £2.4 trillion public debt and all the servicing costs this entails, tax to GDP levels approaching record highs or 37.5% and corporation tax moving to 25% from 19% for financial year 2023/24. Financial outlook statements for generations of UK PLC management have concentrated on the status quo as opposed to a more dramatic plan to seriously kick start growth, confidence, and the all-important upside this brings.
“We have an advantage in that UK PLC is the sixth largest global company or economy in the world with all the scale and reach that this brings. This is about a bold and large plan to ensure that we deliver on its full potential and unleash the prosperity that a large part of the UK shareholders want. This would include making Brexit work, tackling the lack of productivity including the regional inequality gap which has entrenched itself since 2008, an overhaul of the corporate and individual tax structure making the UK a highly attractive place to do business, and having an open an honest debate about the sacred cows including the NHS.
“The alternative to a bold and wide changing economic plan, which is not purely based on industrially low interest rates and quantitative easing, is continued stagnation and underperformance. This will not be easy, but the alternative is to sell out the next generation which should never be a consideration.”
Chieu Cao, CEO of Mintago: “Even if today’s interest rate decision does contribute to reducing inflation in the long-term, it’s unlikely that the financial stress that many Britons are grappling with will be going away any time soon. So, it’s more important than ever that people are equipped with the tools they need to navigate what continues to be an incredibly challenging economic climate.
“These tools must be provided by employers, many of whom are not doing enough to support their staff where financial wellbeing is concerned. Indeed, while the rising cost-of-living was the greatest source of stress for 62% of Britons, a staggering 64% of employers do not have initiatives in place that are designed to improve their staff’s financial wellbeing, according to Mintago’s research.
“Employers must take action and engage with their employees about the financial difficulties that they are facing. By providing more targeted financial wellbeing support – such as educational resources, access to financial advisers or an interactive pension contribution dashboard – that suits the unique needs of each employee, businesses can alleviate a great deal of the financial stress that people are facing, ensuring staff can stay on track for a secure financial future.”