The Bank of England raised interest rates by 0.25 percentage points, to 5.25 percent. It warned that borrowing costs would likely remain high despite a slowdown in inflation.
The Monetary Policy Committee of the central bank voted on Thursday by six to three to raise interest rates to their highest level in 15 years. Two members preferred a larger move of 0.5 percentage points and one voted to pause.
The majority of economists predicted a quarter point increase after the inflation dropped to a 15 month low of 7.9% in June.
The MPC warned that it was “too early” to say that the economy had reached or was very near a turning point.
Andrew Bailey, governor of the BoE, said that interest rates must remain high in order to bring inflation back to its target.
This raises the possibility of even more pain for homeowners as we approach the next general elections. Shadow chancellor Rachel Reeves claimed that a “Tory Mortgage Bombshell” is hitting families very hard.
BoE’s forecasts brought some good news to Rishi Sunak the Prime Minister, who promised to reduce inflation by half to 5,4% by the end the year. The central bank predicted that inflation could fall below 5% in the fourth quarter. Jeremy Hunt, the chancellor, also welcomed the BoE’s prediction that a recession could be avoided and that inflation would likely be lower than 3 percent by next August, when the next elections are held.
Sunak was rumored to replace Hunt by some Tory officials in a summer reshuffle. But the chancellor cautioned against any major changes of direction.
He said, “The plan works.” We must stick to our plan and not veer off like a shopping cart.
The UK prices are still increasing at a higher rate than other advanced economies like the US, Japan, and the Eurozone.
After the BoE’s decision, the pound fell and UK Government Bond Yields dropped before the day ended little changed. The pound fell to a low of $1.2623, a level not seen in five weeks, shortly after the BoE’s announcement. It then recovered its losses and traded at $1.2717.
Bailey said that there were “more than one paths” to bring inflation back to target.
According to the bank’s latest forecasts, inflation will not reach BoE’s target of 2 percent until 2025.
MPC stated that this is because they now see evidence of a feedback between wages and price, which means “some of risks of greater persistency”. . . had crystallised”.
The bank reiterated its previous advice, saying that it would need to tighten monetary policy if there were signs of persistent inflationary pressures.
In a new phrase, the statement also stated that it “would ensure the bank rate is sufficiently restrictive for a sufficient period of time to return inflation back to the 2-percent target”.
The report said that, while the economy showed “surprising resiliency”, the higher borrowing costs are now beginning to have an impact on the activity. There are also more signs of the job markets cooling down and the unemployment rate rising.
The MPC’s latest forecasts, based on higher rates of interest and a stronger currency than its May projections, show a weaker economic path, with consumer expenditure slowing down, business investments swinging from expansion to contraction in 2024, and housing investment dropping sharply.
Bailey added: “The economy is much more resilient, and that’s good news.” We were here in November last year saying the recession would be long and shallow. . . “That has not happened.”
The BoE stated that it expects the gross domestic product to grow at a steady quarterly rate of 0.2 percent in the near-term, but will weaken over time as the effects from higher interest rates accumulate.
The government also expects that inflation will continue to fall in the near future, with an average of 6.9 percent in the third quarter 2023 and 4.9% in the fourth quarter.
Mortgage borrowers with variable-rate deals will feel the impact of the quarter point increase first. Lenders typically pass on the increases to their customers following a BoE change in the base rate. Four-fifths (45%) of mortgage borrowers with fixed-rate agreements will be protected.