Bank of England raises borrowing costs to 15-year peak, signals rates to remain high.

Bank of England raises borrowing costs to 15-year peak, signals rates to remain high.

The Bank of England Raises Interest Rates to 15-Year Peak

London, Aug 3 – In a move that surprised few observers, the Bank of England (BoE) raised its key interest rate by a quarter of a percentage point, bringing it to a 15-year peak of 5.25%. This decision comes after both the U.S. Federal Reserve and the European Central Bank also raised rates by a quarter-point last week. However, unlike its counterparts, the BoE gave little indication that rate hikes were nearing an end, as it continues to combat high inflation.

“The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target,” the BoE stated, emphasizing their commitment to combat inflationary pressures that may persist.

British inflation reached a 41-year high of 11.1% last year and has been slow to decline compared to other major economies. It stood at 7.9% in June, the highest among these economies. ANBLEs (Anonymous Experts) polled by ANBLE last week predicted that BoE rates would peak at 5.75% later this year. The BoE’s own forecasts, which were influenced by recent market assumptions, initially predicted rates would peak at over 6% and average nearly 5.5% over the next three years.

Governor Andrew Bailey explained, “Inflation hits the least well-off hardest, and we need to make absolutely sure that it falls all the way back to the 2% target.”

A Three-Way Split Decision

The MPC members voted 6-3 in favor of the interest rate increase. However, for the first time this year, there was a three-way split. Catherine Mann and Jonathan Haskel voted for a half-point increase this month, while Swati Dhingra advocated for no change, cautioning against overtightening. Market expectations had suggested a roughly one-in-three chance of a larger increase to 5.5%, which would have mirrored June’s significant rise.

Steady Decline in Inflation Forecasted

The BoE foresees inflation falling to 4.9% by the end of this year—a faster decline than previously predicted in May. This forecast brings relief to Prime Minister Rishi Sunak, who had pledged in January to halve inflation during the year. Achieving this goal had seemed challenging, but the revised prediction indicates progress. However, the BoE expects inflation to decline at a slower pace from late next year. It anticipates inflation returning to the 2% target in the second quarter of 2025, three months later than forecasted in May.

Factors Influencing Inflation Outlook

The BoE has incorporated more of the upside risks to inflation, as observed in May, into its central forecast. Despite the larger-than-expected fall in inflation in June, the outlook for services price inflation, which provides insight into longer-term price trends, remains high. Additionally, wage growth is expected to reach 6% by year-end, up from May’s forecast of 5%. The BoE attributes higher wages as a significant driver of high inflation, rather than companies’ profit margins.

Economic Growth Projections and Housing Market Impact

While noting the economy’s recent “surprising resilience,” the BoE made minimal changes to its growth forecasts from three months ago. The economy is projected to expand by a meager 0.5% in 2023 and 2024, and just 0.25% in 2025. Conversely, the jobless rate is predicted to rise to 4.8% by late 2025—an increase from May’s forecast of 4.4%.

Mortgage costs have reached their highest levels since 2008, which has weighed on house-building. In line with this, the BoE expects a 5.75% decline in housing investment this year and a further 6.25% decline in 2024.

The BoE’s decision to raise interest rates reflects its commitment to tackle inflationary pressures. The move sets it apart from other central banks, such as the U.S. Federal Reserve and the European Central Bank, which have given indications of slowing the pace of rate hikes. As the British economy strives to bring inflation back to its 2% target, the impact on various sectors, such as housing and wage growth, will be closely watched in the coming months.

(This story has been corrected to clarify that the unemployment rate forecast is for late 2025, not late 2024, in paragraph 17)

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