Bank of England Hikes Rates to Combat Persistent Inflation

Highlights

• Bank Rate increased by 0.25% to curb inflation
• Wage growth exceeds expectations at 7.7%
• MPC expects inflation to hit 2% target by 2025 Q2

Bank of England Tightens Monetary Policy Amid Rising Inflation

In an effort to rein in persistent inflation, the Bank of England’s Monetary Policy Committee (MPC) voted by a majority to hike the Bank Rate by 0.25 percentage points to 5.25%. This decision, made on August 2nd, 2023, shows the bank’s aggressive stance to meet its 2% inflation target while supporting growth and employment. The updated projections hint at a market-implied path for the Bank Rate to reach just over 6% and average under 5.5% over a three-year forecast period.

Resilient Economy

The economy showed signs of resilience during the first half of the year, with quarterly GDP growth estimated at 0.2%. Strong household income and retail sales volumes supported this growth. However, some indicators such as the July S&P Global/CIPS UK composite PMI, suggest a potential weakening. The labour market remains tight, but some loosening signs are evident as the unemployment rate rose to 4.0% in the three months to May.

Inflation Concerns Loom

Inflation concerns continue to loom over the economy. Despite a decline from 8.7% in May to 7.9% in June, the CPI inflation remains well above the 2% target. Projections expect inflation to fall further to around 5% by year-end due to lower energy, food, and core goods price inflation. Wage growth has also surged to 7.7% in the three months to May, significantly exceeding expectations, although it’s expected to drop to around 6% by the end of this year.

MPC Targets 2% Inflation by 2025 Q2

The MPC predicts that inflation will return to the 2% target by 2025 Q2, and then fall below the target due to reduced inflationary pressures domestically and externally. The Committee warns that the risks around the inflation forecast are skewed to the upside, reflecting the possibility of persistent effects of cost shocks on wage and domestic price inflation.

MPC Committed to Stable Prices

In conclusion, the MPC is committed to maintaining price stability. Further tightening in monetary policy would be required if more persistent inflationary pressures are detected. The Bank Rate will be kept sufficiently restrictive for long enough to sustainably return inflation to the 2% target in the medium term, aligning with its remit.