The Bank of England Raises Interest Rates for the Fourteenth Time
The Bank of England has announced its decision to raise interest rates for the fourteenth consecutive time, bringing the official rate to 5.25%. This quarter percentage point increase was slightly lower than what some economists had predicted, following the release of lower-than-expected inflation data last month.
Bank Governor Andrew Bailey expressed optimism about the falling inflation rate, stating, “Inflation is falling, and that’s good news. We know that inflation affects the least well-off the hardest, and we need to ensure that it falls back to the 2% target. That’s why we have raised rates to 5.25% today.”
While the Bank’s forecasts do not indicate an impending recession, they do paint a picture of a weaker economy than previously anticipated. The forecasts suggest that the economy will remain relatively stagnant until 2026. This is primarily due to the expectation that interest rates will remain high for a longer period than initially predicted.
The Bank did not provide its own interest rate forecasts, but it strongly hinted that borrowing costs are expected to stay elevated for an extended period. In the minutes of its policy meeting, the Bank stated, “The Monetary Policy Committee will ensure that Bank Rate remains sufficiently restrictive for a sustained period to bring inflation back to the 2% target in the medium term, in line with its remit.”
Interest Rate Hike and MPC Decision
The decision to raise interest rates was not unanimous among the nine-person Monetary Policy Committee (MPC). Two members, Catherine Mann and Jonathan Haskel, voted for a larger increase, while one member, Swati Dhingra, voted to keep rates unchanged.
Economists and financial markets are anticipating further rate hikes, with markets pricing in a peak rate of 5.75% or slightly higher. The Bank’s forecasts suggest that the government is on track to meet its pledge of halving inflation by the end of the year, with a projected rate of around 4.9% in the final quarter. However, there is still considerable uncertainty, with a 20% chance of a higher figure.
GDP Growth Forecast
The Bank’s forecast for gross domestic product (GDP) growth in the year up to the third quarter has been revised slightly higher, from 0.6% to 0.8%. However, this growth rate is still significantly below what would be considered “trend growth.” The GDP forecast for the same period in 2024 was reduced from 0.6% to 0.3%, as was the forecast for 2025 (from 0.8% to 0.3%). Overall, these forecasts indicate a prolonged period of sluggish economic growth.
Chancellor Jeremy Hunt commented on the Bank’s forecasts, stating, “If we stick to the plan, the Bank predicts that inflation will be below 3% in a year’s time without the economy falling into a recession. However, we understand that higher mortgage bills pose challenges for families, so we will continue to support households as much as possible.”
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