Bank of England raises interest rates to rein in price pressures

The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to raise Bank Rate by 25 basis points (to 4.5%), in line with CBI and market expectations. This marks the 12^th consecutive increase in interest rates. Inflation has remained higher than the Bank previously expected and, with the risk that strong domestic price pressures prove to be more persistent, the majority of the MPC judged that another rate hike was needed in this meeting.

The Bank’s latest forecast painted a less gloomy picture of the UK economic outlook. GDP is expected to be flat over H1 2023 and then grow at a moderate pace over the next three years, compared with previous expectations of a shallow recession throughout 2023 and Q1 2024. Inflation is projected to ease considerably from April, mostly due to lower energy prices, but services inflation – which is more domestically-driven – is anticipated to remain elevated. This means that inflation does not fall below its 2% target until early 2025, and the MPC warned that inflation may prove harder to bring down if domestic pay pressures remain strong.

The MPC’s messaging continues to suggest that we’re approaching the peak in interest rates. In the coming months, the MPC will be looking closely at indicators of domestic price pressures, such as wage growth and services price inflation, to determine if further monetary tightening is required. It’s reasonable to expect at least one or two more rate rises in the coming months, but the degree of further monetary tightening will be heavily dependent on just how these much domestic price pressures persist.