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Bank of England signals rates to stay high as borrowing costs hit 15-year high
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Demonstrators wearing masks depicting Britain's Prime Minister Rishi Sunak and the Governor of the Bank of England Andrew Bailey participate in a protest against the hiking of interest rates outside the Bank of England in London on Aug. 3, 2023. (Reuters/Susannah Ireland)
T
he Bank of England raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25 percent on Thursday, and gave a new warning that borrowing costs were likely to stay high for some time.
Unlike the US Federal Reserve or the European Central Bank - which also both raised rates by a quarter-point last week - the BoE's Monetary Policy Committee gave little suggestion that rate hikes were about to end as it battles high inflation.
"The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2 percent target," the BoE said in fresh guidance about the outlook for borrowing costs.
"Some of the risks of more persistent inflationary pressures may have begun to crystallize," it added.
Governor Andrew Bailey spelt out that message to reporters after the announcement, saying the pace of pay growth was "materially above" the BoE's previous forecasts.
"In our judgement, upside surprises on wage inflation suggests that it will take longer for second-round effects to go away than it did for them to appear," he said.
Wage rises had been a bigger driver of high inflation than companies' profit margins, the BoE said.
British inflation hit a 41-year high of 11.1 percent last year and has fallen more slowly than elsewhere, standing at 7.9 percent in June, the highest of any major economy.
Economists polled by Reuters last week forecast BoE rates would peak at 5.75 percent later this year. The BoE's own forecasts were based on recent market assumptions - which have now eased somewhat - that rates would peak at over 6 percent and average nearly 5.5 percent over the next three years.
"Inflation hits the least well-off hardest and we need to make absolutely sure that it falls all the way back to the 2 percent target," Bailey said.
Sterling briefly dipped after the data and financial markets moved to price in a roughly two-thirds chance of another quarter-point interest rate rise to 5.5 percent in September.
"One weak data point will not be enough for the Bank to be satisfied that inflation is now on a sustainable trajectory. We expect at least one more 25 bps rate hike in September," said Thomas Pugh, an economist with accountancy firm RSM UK.
THREE-WAY SPLIT
Policymakers voted 6-3 for the increase, but were split three ways on the decision for the first time this year. Two MPC members - Catherine Mann and Jonathan Haskel - voted for a half-point increase this month, while Swati Dhingra again voted for no change, warning of the risk of smothering the economy.
Markets had seen a roughly one-in-three chance of a bigger increase to 5.5 percent, which would have repeated June's big rise.
The BoE forecast inflation would fall to 4.9 percent by the end of this year - a faster decline than it had predicted in May.
This will be a relief for Prime Minister Rishi Sunak, who pledged in January to halve inflation this year, a goal which had looked challenging.
"If we stick to the plan, the Bank forecasts inflation will be below 3 percent in a year's time without the economy falling into a recession," finance minister Jeremy Hunt said after the BoE's announcement.
However, the BoE forecasts inflation will be slightly slower to fall from late next year. Inflation does not return to its 2 percent target until the second quarter of 2025, three months later than it forecast in May.
The BoE said it was incorporating more of the upside risks to inflation which the MPC saw in May into its central or "modal" forecast, despite a bigger-than-expected fall in inflation in June.
Services price inflation - which the BoE said offered a signal on longer-term price trends - was projected to stay high, and wage growth at the end of this year was expected to be 6 percent, up from May's forecast of 5 percent.
The BoE, which noted the economy's recent "surprising resilience", barely changed its growth forecasts from three months ago, with the economy due to expand a meager 0.5 percent in 2023 and 2024, and just 0.25 percent in 2025.
The jobless rate is predicted to rise to 4.8 percent by late 2025, up from a forecast of 4.4 percent in May and 4.0 percent in the latest data.
Mortgage costs have hit their highest since 2008, weighing on house-building. The BoE forecast housing investment would fall 5.75 percent this year and 6.25 percent in 2024.
