Bank of England Admits Inflation Will Hit 11% This Year, Resists Calls for Steeper Interest Rate Hikes

Strategic Insights -

The Bank of England has revised its inflation prediction upwards to 11%, citing global factors including the war in Ukraine and domestic issues such as the tight labor market, as well as companies increasing wages and prices. Despite this, the Monetary Policy Committee has opted for a fifth consecutive 0.25-percentage-point interest rate hike, keeping rates at 1.25%, the highest level since the financial crisis. However, a minority of three members voted to raise rates further to 1.5%, fearing inflation is spreading through the economy and warning that getting on top of any wage-price spiral now would be crucial to avoid more abrupt rate hikes in the future.

Key Takeaways:

  • The Bank of England has revised its inflation prediction to 11%, citing global factors and domestic issues.
  • The Monetary Policy Committee has opted for a fifth consecutive 0.25-percentage-point interest rate hike, keeping rates at 1.25%.
  • A minority of three members voted to raise rates further to 1.5%, fearing inflation is spreading through the economy.
  • The Bank warns that getting on top of any wage-price spiral now would be crucial to avoid more abrupt rate hikes in the future.
  • The economy is already on the brink of recession, and the Bank expects it to shrink by 0.3% in the second quarter.
  • Inflation is 6 times the Bank's 2% target.
  • The base rate has increased from 0.1% to 1.25% in six months.
  • The Bank will be particularly alert to indications of more persistent inflationary pressures and will act forcefully in response if necessary.
  • The Bank estimates that Mr. Sunak's recent package of support for families in the face of higher energy bills could add another 0.1 percentage points to inflation.

Statistics:

  • Inflation is forecast to reach 11% in October.
  • The economy is expected to shrink by 0.3% in the second quarter.
  • The base rate has increased from 0.1% to 1.25% in six months.
  • The unemployment rate is currently at 3.8%.
  • 1.3m more staff are being sought to be hired, matching the number of unemployed jobseekers.
  • The 0.1 percentage point of GDP will be added to the economy when October arrives.

Sources:

  • Rishi Sunak, Chancellor of the Exchequer
  • Andrew Bailey, Bank Governor
  • Paul Dales, Capital Economics
  • Karen Ward, chief market strategist at JP Morgan Asset Management
  • Christine Lagarde, European Central Bank President
  • Bank of England Monetary Policy Committee