The Bank of England raised interest rates from 0.5% to 0.75% on Thursday, underscoring its determination to tackle soaring inflation, which is now expected to hit 8% by the end of June.
The quarter-point hike – the third straight increase since December – took interest rates back to pre-Covid levels and puts the BoE at the forefront of a global policy tightening move monetary policy, after this week’s increase by the United States. Federal Reserve.
The Monetary Policy Committee said Russia’s invasion of Ukraine “would exacerbate both the spike in inflation and the negative impact on activity by intensifying pressure on household incomes.”
It now expects inflation to hit around 8% in the second quarter of 2022 – about 1 percentage point higher than its February forecast – and potentially even higher in October, when regulated energy prices are expected increase again.
This means that inflation could temporarily increase to double digits: the minutes of the MPC meeting said that if the latest increase in energy futures continues, consumer price inflation could be “several percentage points” than expected in February, with a disruption in global supply chains also threatening to fuel inflation in basic goods.
Eight of the nine MPC members voted to raise rates to reduce the risk that businesses and households will come to see these high levels of inflation as normal – adjusting their prices and wage demands accordingly, in an auto spiral. -director.
However, the MPC was much more cautious about the potential path of interest rates over the coming year, in contrast to the hawkish tone adopted by the US Federal Reserve on Wednesday.
The committee said that while business confidence and the labor market had so far remained strong, consumer confidence was already down and pressure on household incomes was expected to be “significantly greater” than expected in February. , weakening already subdued growth prospects.
He said that “modest further monetary policy tightening” may be needed over the next few months, but that there were risks on both sides of that judgment, and that he “would review developments at the light of incoming data” before updating its forecast in May.
Samuel Tombs of consultancy Pantheon Macroeconomics said the minutes suggested the MPC “won’t be raising the discount rate as aggressively as markets had expected heading into the meeting”, noting that it no longer said further tightening was “likely”.
The pound sold off against the dollar after the decision was announced, and ING analysts said it could weaken further as the BoE’s tone was “much more cautious than the Fed yesterday evening” – a reminder that the UK, as an energy importer, was “more sensitive to events in Ukraine”.
The four MPC members who had voted for a 50 basis point rate hike at the last meeting in February now favored a more modest quarter-point increase. Sir Jon Cunliffe, a BoE deputy governor, opposed the majority, voting to leave the policy unchanged, arguing that the effect of the war in Ukraine on household incomes and on business confidence and consumers would affect economic activity and employment and reduce inflation.