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The Bank of England hiked rates as expected to 4% today, following the US Federal Reserve, which also announced interest rate hikes in line with market expectations. But the UK central bank said that inflation is expected to fall in the latter half of 2023 – and that price rises may have turned the corner. The Bank also said that the the recession is likely to be shorter and shallower than previously forecast in November last year. This tentatively upbeat assessment is at odds with the latest view from the International Monetary Fund, which forecast that the UK economy will be the worst performer in the G7 this year.
The BoE's monetary policy committee raised the UK bank rate by 50 basis points - half a percentage point – to 4%. Of the nine policymakers, seven members voted for the 50-point hike and two for no change. This follows a 50 basis point hike in the previous meeting, in December 2022.
Market expectations are that rates will peak at 4.5% before declining. “The hope now is that the bank rate is either at or near the peak, with reductions coming further down the line as the BoE looks to balance the threat of high inflation against a slowing economy,” says Alice Haine, personal finance analyst at BestInvest.
But it’s too early to say the war on inflation has decisively been won, with the consumer price index still above 10%, according to ONS data. January figures, which will be eagerly watched by households and policymakers, will be released in the next couple of weeks. UK shop prices are at record highs, with food inflation rampant, according to data out this week.
Still, Bank of England governor said today that inflation has “turned the corner” and will fall back significantly in the second half of this year. Falls in energy prices are expected to be the main driver of the drop in overall inflation.
Karen Ward, chief market strategist EMEA at J.P. Morgan Asset Management says the Bank has to make the “unpopular choice” in increasing borrowing costs in a weaker economic environment:
“The decision by the Bank of England to raise interest rates a further 50bp might appear puzzling given the extent to which growth in the UK is already weakening. Indeed, the latest set of forecasts released by the IMF showed that the UK is the only major economy expected to shrink this year. Why then would the Bank of England want to slow the economy even further?
“The problem is that the UK’s ability to supply goods and services appears to be suffering more acutely than our demand for those goods and services. And hence, inflation remains a problem.”
On Wednesday, the Federal Reserve raised US interest rates by 25 basis points, slowing from 50 points in December and 75 points per meeting earlier in 2022. The Federal Open Market Committee lifted the target range for the federal funds rate to 4.50% to 4.75% from a previous range of 4.25% to 4.50%. All twelve members of the committee voted for the rise.
The European Central Bank completed the triumvirate of central bank decisions by increasing rates 0.5% to 2.5% at today's meeting. It also guided that the March 16 meeting will see another 50 basis point rate rise. Smaller increases are expected by the Bank of England and the Federal Reserve at their next meetings, which are March 23 and March 22 respectively.
