Britain is heading for double-digit inflation and an almost inevitable recession, the Bank of England warned today as it hiked interest rates to a 13-year high.
The Bank’s monetary policy committee raised rates by 25 basis points to 1%, based on votes from governor Andrew Bailey and five other MPC members, with the remaining voters pushing for a hike to 1.25%.
Combatting inflation is the main reason for what is the committee’s fourth consecutive rate rise, with the consumer price index hitting 7% last month and expected to keep rising as the energy price cap leapt this month and is due to be lifted another 40% in October.
Bailey warned that inflation is now expected to hit 10% towards the end of the year.
Surging prices are then expected to choke consumer spending and lead to unemployment jumping from 3.6% this year to 5.5% by 2025.
While the economy is expected to expand by 3.75% this year, UK gross domestic product (GDP) is forecast by the MPC to fall 0.25% next year before rebounding in 2024.
As well as inflation, but Bailey and co see a drop in global demand for UK goods and services as the world economy also struggles.
Trade unions said today’s rise and further hikes will pile more pressure on workers, as mortgages and rents rise along with food and energy prices. Unite chief Sharon Graham said rate hikes “will pile more financial pressure on ordinary families”.
With most members of the committee judging that “some degree of further tightening” will be appropriate in coming months, there were warnings from financial markets that many feel the Bank is on course for a policy error.
Updated MPC forecasts show it anticipates inflation will fall to 1.3% in three years’ time, following the bank rate rising to a peak of 2.5% one year from now.
“The undershoot [on the BoE’s 2% inflation target] suggests the market path for rates is thus too steep,” said economist Kallum Pickering at Berenberg.
Following the rate hike, currency and bond markets seemed unimpressed, with the pound and bond yields slipping lower.
“This is a mark of how hawkish the market is expecting central banks to be. Policy makers are now being judged not only on delivering rate hikes, but the size of these increases too,” said Laith Khalaf, head of investment analysis at AJ Bell.
But Samuel Tombs at Pantheon Macroeconomics said the MPC’s minutes and new forecasts signal that it envisages raising interest rates less substantially than markets currently expect.
“While the word ‘modest’ has been swapped for ‘some degree’, this reflects the wide range of views regarding the need for further tightening that we already knew about, rather than a hawkish tilt,” said Tombs.
“The rhetoric here isn’t strong enough to support markets’ view that Bank Rate will rise to 2.50% early next year, which would represent the largest increase over an 18-month period since 1989. The new forecasts reinforce this message.”
He thinks rates will be kept steady at next month’s meeting, before being hiked it to 1.25% in August and then kept it at that level “well into 2023”.
At the other end of the scale, Capital Economics predicts longer-lasting domestic price pressures will mean interest rates are lifted to a peak of 3.00% next year.