The Bank of England raised interest rates on Thursday, the 12th consecutive increase, as Britain’s inflation rate held steady in double digits.
Policy makers raised the central bank’s main interest rate a quarter of a percentage point to 4.5 percent, the highest level since 2008. Protracted and resolute policy tightening continues as Britain experiences higher inflation than in the United States and Western Europe. The latest data showed that consumer prices rose 10.1 percent in March compared to the previous year, as food prices rose at a faster-than-expected pace, along with prices of other goods such as clothing.
A rate hike addresses “the risk of continued strength in domestic prices and wage determination,” according to the bank’s meeting minutes this week.
Britain’s inflation rate is expected to decline more slowly than the central bank forecast three months ago, mainly because food price inflation is expected to decline slowly. In March, food prices were about 20 percent higher than a year earlier, the fastest pace of inflation in more than 45 years.
By the end of the year, the headline inflation rate, which includes food and energy prices, is expected to fall to 5.1 percent, according to the central bank’s forecast. Consumer price data for April, which will be published later this month, is expected to show that inflation begins to slow more substantially as the rise in household energy bills washes out of the annual inflation accounts. A year ago, household energy bills rose more than 50 percent after the war in Ukraine sent up wholesale prices.
As the Bank of England tries to bring inflation down to its 2 percent target, good economic news could complicate its task. Three months ago, when the central bank published its latest forecasts, it had a particularly pessimistic view of the British economy, predicting five quarters of economic contraction and a mild recession. On Thursday, it unveiled the largest upgrade to its economic forecasts in the bank’s history, due to lower wholesale energy prices and additional fiscal stimulus from the government. No longer expected any quarters of economic downturn.
Rather than stagnate, this better-than-expected growth, with lower unemployment and higher consumer confidence, may allow some inflationary pressures in the economy to persist for longer than previously thought.
Policymakers who voted to raise interest rates said, according to meeting minutes, that “frequent surprises” about the economy’s resilience and labor market tightness created “conditions in which domestic price pressures risk becoming more persistent.”
However, the upgraded economic outlook is likely to offer limited relief to households and businesses. The outlook is weak: the economy will grow by about a quarter of a percent this year, according to the bank’s projections.
The Bank of England was the first major central bank to start raising interest rates in nearly a year and a half. Investors and economists are now trying to gauge how close central banks, including the Federal Reserve and European Central Bank, will stop their hikes. In the United States, inflation fell below 5 percent last month, and Federal Reserve Chairman Jerome H. Powell opened the door to a temporary pause in interest rates amid turmoil in the US banking sector.
In the eurozone, inflation has also peaked, but so-called core inflation, which excludes food and energy prices, remains strong. Last week, Christine Lagarde, the president of the European Central Bank, said that the bank is not done raising interest rates yet, having only started to raise interest rates last summer.
Bank of England policymakers offered few clues about what will happen next, but note that most of the impact of previous interest rate increases remains unfelt. For example, the bank said that many homeowners with fixed mortgage rates have not yet had to pay higher borrowing costs.
Two members of the bank’s nine-person rate-setting committee, Swati Dhingra and Silvana Tenreyro, have voted to keep interest rates steady, as they have in recent meetings, citing a lag from previous rate hikes and arguing that the current amount of policy tightening would It pushes inflation “well below” the 2 per cent target.
The minutes of the committee meeting said that policy makers will continue to closely monitor any signs of persistent inflation, particularly wage growth and inflation in the service sector. “If there is evidence of further pressure continuing, further tightening will be required,” the minutes said.
Economists at the National Institute of Economic and Social Research said earlier Thursday that they expect interest rates to peak at 4.75 percent, but they could stay at that level for longer than they previously thought because of the risk that inflation will not slow as quickly. is expected.
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