The Bank of England raised interest rates by 0.25 percentage points on Thursday and warned it expected inflation to climb above 11 per cent before the end of the year.
The increase — the fifth time the bank’s Monetary Policy Committee has tightened policy in back-to-back meetings — takes the BoE’s benchmark rate to 1.25 per cent. But in a split vote, the committee held back from making a bigger 0.5 percentage point move, which won support from just three members.
The BoE nonetheless signalled that it would “act forcefully” if needed to prevent high inflation becoming more persistent.
It also changed its guidance on the likely path of interest rates at future meetings, saying that the scale, pace and timing of further increases would reflect the evolving economic outlook, and that the committee would be “particularly alert to indications of more persistent inflationary pressures”. It had previously said “some degree of further tightening” might be appropriate in the coming months”.
The measured approach is in contrast with the more aggressive action taken this week by the US Federal Reserve, which on Wednesday raised its benchmark rate by 0.75 percentage points, while signalling that further rate increases could be both larger and swifter than expected.
The pound fell after the Bank of England announcement, extending early losses to trade 0.9 per cent lower at $1.2066.
The BoE acknowledged that excess inflation was no longer due only to global events, with inflationary pressures strengthening in consumer services, and core consumer goods inflation now higher in the UK than in the US or eurozone.
It now expects CPI inflation, which hit a 40-year high of 9 per cent in April, to rise slightly above 11 per cent in October — higher than its May forecasts suggested — reflecting more recent estimates of the likely increase in regulated energy prices.
It also said the government’s newly announced cost of living support could boost GDP by 0.3 per cent, and raise CPI inflation by 0.1 percentage points in the first year, although it plans to assess the impact in more detail in its August forecasts.
Although the BoE’s staff now expect GDP to fall by 0.3 per cent in the second quarter of the year — a weaker outcome than projected in the bank’s May forecasts — the committee saw little change in the outlook for growth, with consumer spending and business sentiment broadly holding up.
It also saw little change in hiring and wage pressures in the labour market, with businesses telling the BoE they expected to struggle with recruitment for at least the next 12 months. There was a risk that “some self-sustaining momentum in domestically generated inflation would persist” even as the economy slowed, the committee noted.
Committee members Jonathan Haskel, Catherine Mann and Michael Saunders voted for a larger rate increase, arguing that policymakers should “lean strongly against risks that recent trends in pay growth, firms’ pricing decisions and inflation expectations . . . would become more firmly embedded”.
However, the majority favoured a smaller 0.25 per cent increase, arguing that demand might already be starting to slow in line with the BoE’s May forecasts — which had shown inflation falling below its 2 per cent target within three years.