Bank of England pushes button for jumbo rise: but is 0.5% shock rise too late as inflation shows no sign of slowing down?
The Bank of England yesterday raised interest rates to a 15-year high as it admitted inflationary pressures were intensifying.
Members of the Bank’s Monetary Policy Committee (MPC) voted 7 to 2 for a half percentage point increase to 5 percent.
Only Swati Dhingra and Silvana Tenreyro voted not to raise tariffs.
The magnitude of the increase surprised most economists. But financial markets started betting on it becoming increasingly likely after worse-than-expected inflation numbers a day earlier.
They showed the consumer price index (CPI) of inflation at 8.7 percent in May – unchanged from April and 0.3 percentage point higher than the bank had expected.
Inflation battle: Members of the Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7 to 2 for a half percentage point increase to 5%
More worryingly, a measure of core inflation — which discounted volatile factors such as food and energy costs — went in the wrong direction, rising to 7.1 percent.
Bank Governor Andrew Bailey said in a letter to Chancellor Jeremy Hunt yesterday: “CPI inflation remains far too high, and inflation in core goods and services has risen.”
However, he added that the rate is “expected to continue to fall significantly over the course of the year,” mainly due to falling energy prices.
Some economists said yesterday’s rate hike — a step up from the last quarter-point increases — was a panic reaction after the Bank had been too hesitant to raise rates in recent months.
Bailey denied this, saying it had taken “decisive action” by raising rates by 0.1 percent since December 2021.
But its anti-inflation record – which is higher than any other G7 country – pales in comparison to that of the US, where inflation has already fallen to 4 percent.
Bailey dismissed claims that the bank, in an effort to curb inflation, was trying to provoke a recession.
“We don’t expect a recession, we don’t desire a recession, but we will do whatever it takes to bring inflation back to target,” he said.
The MPC said the latest evidence pointed to “continued inflationary pressures.”
Of the Bank’s Monetary Policy Committee, only Swati Dhingra and Silvana Tenreyro (pictured) voted against rate hikes
But it acknowledged that it would take some time for the impact of the series of increases the Bank has made since 2021 to take effect, given the millions in fixed-rate mortgage deals that have yet to be impacted.
The Bank said it would continue to watch for signs that inflation in the economy as a whole will prove difficult.
“If there were any indications of continued pressure, further tightening of monetary policy would be necessary,” it said.
The decision came within a week as more evidence emerged of the impact of higher rates on homeowners as lenders scrambled to close their cheapest deals.
The average interest rate on two-year fixed-term contracts has risen above 6 percent for the first time since the market turmoil caused by Liz Truss’ mini budget.
Janet Mui of asset manager RBC Brewin Dolphin said: “The bank has faced increased scrutiny and pressure on its ability to reduce inflation, as well as doubts about its forecasting credentials.
Today’s raise is a desperate move to show markets that despite the pain it has caused, it is deeply committed to its mandate.”
Hargreaves Lansdown’s Susannah Streeter said: “It’s not so much aggregate CPI that has driven this move, but concerns that inflation-led wage increases are becoming embedded in the economy.”