The Bank of England adds 50bps to Bank Rate

The Bank of England has added another 50 basis points to Bank Rate, as it battles inflation, leading to a new 14-year high of 3.50%.

As with the rest of the world, the UK has been battling inflation, whilst being heavily affected by Russia’s invasion of Ukraine, further disrupting supply chains that were recovering from the COVID-19 pandemic.

The 50 bps increase is smaller than the previous 75 basis point hike that was announced in the Bank’s last meeting. It reflects that quarterly GDP growth has been negative for the last three months, whilst also acknowledging that both inflation and wage growth has remained relatively high.

The bank released the following statement:

"The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.”

In November, inflation has fallen by more than expected, down to 10.7% from 11.1% in October. However, it is a long way from the Bank’s target of 2%. Meanwhile, average earnings are rising at their fastest rate since records began, except for a period during the COVID-19 pandemic.

Certain factors have relieved the pressure from the Bank since its last meeting, such as pound rising by al-most 3% on foreign exchange markets, mitigating the inflation from import prices, particularly energy. It was also affected by a more balanced budget proposal for next year that abandoned plans for huge and unfunded tax cuts.

Future expectations

In his letter to the Chancellor, Andrew Bailey, the governor of the BoE, discusses that inflation is “expected to remain very high in the next few months as global and domestic factors continue to push up on consumer price inflation.”

It is therefore clear why the BoE has stated that the majority of Monetary Policy Committee (MPC) members are expecting to have to raise rates further:

"Should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate might be required for a sustainable return of inflation to target.”

In the December meeting, six MPC members voted for the 50 basis point hike, two voted to keep the Bank rate unchanged at 3.0%, and one voted for a hike of 75 basis points.

It is expected that Bank of England will add an additional 50bps in the first quarter of 2023, followed by an increase of 25bps in the second quarter, with medians showing bank rate peaking at 4.25%.

According to Paul Dales at Capital Economics:

"2023 will be a tough year for the economy as the effects of the previous rises in inflation and previous hikes in interest rates are felt.

"The good news is that we think the recession will end in the second half of 2023 and a gradual fall in inflation will probably allow the Bank of England to inject more vigour into the recovery by cutting interest rates in 2024."