The Bank of England lifted its key interest rate to 3.5% from 3% on Thursday, its ninth successive rate hike as it attempts to accelerate inflation’s return to target after price growth hit a 41-year high in October.
The BoE’s Monetary Policy Committee voted 6-3 in favour of the move, and said “further increases in Bank Rate” may be needed to combat what it fears may be continuous domestic inflation pressures from prices and wages. The BoE stated:
“The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.”
The BoE statement did not restate different language from November when it said rates were unlikely to need to hike as far as markets expected. Market rate projections have fallen since then.
One policymaker, Catherine Mann, wanted a larger rate hike this month on the size of November’s 0.75 percentage point increase – the BoE’s biggest in more than three decades – to combat what she viewed as higher inflation risks since November.
Nevertheless, two other policymakers, Swati Dhingra and Silvana Tenreyro, who had voted against the scale of November’s rise, said it was now time to stop rate hikes entirely, as what had been done so far was “more than sufficient” to bring inflation back to target.
The BoE move comes after the U.S. Federal Reserve’s decision on Wednesday to lift its main rate by half a point, as Western central banks struggle with post-COVID labour shortages and the impact of Russia’s invasion of Ukraine on energy prices.
The European Central Bank is expected to hike interest rates for the fourth successive time on Thursday, although by less than at its last two meetings. BoE Governor Andrew Bailey, in a letter to finance minister Jeremy Hunt resulting from the decision, said the BoE predicts suggested British inflation had arrived at its peak.
Official figures on Wednesday revealed consumer price inflation fell to 10.7% last month from 11.1% the previous month. That 0.4 percentage point drop in the annual rate was the biggest since July 2021.
Budget decisions in Hunt’s November fiscal statement suggested inflation in the second quarter of 2023 would be 0.75 percentage points lower than the BoE had predicted, but the longer-term impact would be minimal, the BoE said.
Unemployment is now advancing, hitting 3.7% in the third quarter of 2022, but pay excluding bonuses still managed to increase at its fastest nominal rate since 2001, up 6.1% from a year ago.
In November, the BoE said Britain was going into a long recession, and forecasted the economy would contract by 0.3% in the fourth quarter of this year. Now it predicts a fall of 0.1%, and for economic output in a year’s time to be 0.4% more than previously expected because of budget measures that offered short-term stimulus.
However, fiscal tightening onwards would leave GDP levels in two years’ time slightly changed from the BoE’s November forecast, and 0.5% lesser than in three years’ time.
