Bank of England Raises Interest Rates to 15-Year High Amid Inflation Concerns

The Bank of England has raised interest rates by 25 basis points to 5.25%, marking the 14th consecutive hike in a bid to combat soaring inflation.

Interest Rates Increased to 5.25%

Andrew Bailey, the governor of the Bank of England has emphasised that inflation hurts lower-income households the most, which is why the Bank has opted for “restrictive” monetary policy.

The Monetary Policy Committee (MPC) voted 6-3 in favor of the quarter-point increase, with two members advocating for a second straight 50 basis point raise, and one voting to maintain rates at their current level.

The Monetary Policy Committee (MPC) decides what monetary policy action to take. The MPC sets and announces policy eight times a year (roughly once every six weeks).

The MPC has nine individual members. Before they decide what action to take, they hold several meetings to look at how the economy is working. 

It can take around two years for monetary policy to have its full effect on the economy. So MPC members need to consider what inflation and growth in the economy are likely to be in the next few years.

Puzzling Market Expectations

Market expectations were divided, with roughly 60% favoring a quarter-point hike, according to Refinitiv data. The MPC, however, gave no indication of easing its tight monetary policy, committing to maintain a sufficiently restrictive Bank Rate to steer inflation back to its 2% target.

Neil Birrell, Chief Investment Officer at Premier Miton Investors, expects the bank to approach the peak in rates cautiously, with further hikes likely. Samuel Zief, Head of FX Strategy at J.P. Morgan Private Bank, also anticipates more hikes until a terminal rate around 5.75%. However, analysts are wary of potential overtightening, given that previous rate rises have yet to impact the real economy significantly.

Harry Richards, Fixed Income Investment Manager at Jupiter Asset Management, emphasized the challenges of using monetary policy to target lagging inflation and unemployment indicators, which can lead to overtightening and adverse consequences.

Mortgage holders on tracker deals face nearly £24 per month being added to their payments, on average, following the latest Bank of England base rate rise.

Worrying Inflation Forecast Amid Cost of Living Crisis

The bank also revised its inflation forecast, predicting a faster decline to 4.9% by the year-end, compared to previous expectations. The rate is projected to dip below 2% during the second quarter of 2025, with 2024 ending at 2.5% and 2025 at 1.6%.

Prime Minister Rishi Sunak received good news as the projections aligned with his commitment to halve inflation by year-end. Finance Minister Jeremy Hunt welcomed the forecast, noting that it predicts headline inflation to drop below 3% in a year without risking a recession. However, he acknowledged the challenges faced by families dealing with higher mortgage costs and assured continued support for households.

In June, headline consumer price inflation moderated to 7.9% from May's hotter-than-expected 8.7%, while core inflation, excluding volatile factors, remained at 6.9%, easing slightly from May's 31-year high of 7.1%. The tight labor market poses challenges, as jobs activity softened in May, yet wage growth remained robust, rising to 7.7% in the private sector.

The bank's previous 50 basis point hike in June came amid surging inflation rates in the UK, far exceeding the central bank's 2% target and outpacing other advanced economies. Although inflation has shown some signs of cooling, the MPC is now facing a complex labor market situation.

The MPC highlighted the need to monitor persistent inflationary pressures and economic resilience, focusing on wage growth, services price inflation, and labor market conditions.