Swindon      01793 524444

Your Local Independent Specialist Insurance, Mortgage and Commercial Finance Advisors

Bank of England raises interest rates to a 13-year high


The Bank of England's Monetary Policy Committee has voted to increase the Bank Rate from 1.0% to 1.25%, marking the fifth consecutive increase as the Committee continues to try and keep rising inflation under control. The MPC has voted for a rise in each of the last four meetings, in December, February, March and six weeks ago in May which saw members vote 6-3 to increase the Bank Rate from 0.75% to 1.0%, with 3 members voting for a higher increase to 1.25%. 

The MPC voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1.25%. Those members in the minority preferred to increase Bank Rate by 0.5 percentage points, to 1.5%.

The Committee advised that its decision to increase the Bank Rate to 1.25% was "In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent."

In the MPC’s central projections in the May Monetary Policy Report, UK GDP growth was expected to slow sharply over the first half of the forecast period and, although the labour market was expected to tighten slightly further in the near term, the unemployment rate was projected to rise to 5½% in three years’ time. CPI inflation was expected to average slightly over 10% at its peak in 2022 Q4.

Conditioned on the rising market-implied path for Bank Rate at that time and the MPC’s forecasting convention for future energy prices, CPI inflation was projected to fall to a little above the 2% target in two years’ time, largely reflecting the waning influence of external factors, and to be well below the target in three years, mainly reflecting weaker domestic pressures. The risks to the inflation projection were judged to be skewed to the upside at these points.

According to the Committee, there has been relatively little news in global and domestic economic data since the May Report, although there have been significant movements in financial markets. UK-weighted global growth in 2022 Q2 appears to be broadly in line with expectations. Global inflationary pressures have remained elevated and oil prices have risen further. Equity markets have ended the period lower, while short and longer-term government bond yields have continued to rise.

UK GDP was weaker than expected in April, partly reflecting a further decline in Test and Trace activity. Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole, weaker than anticipated at the time of the May Report. Consumer confidence has fallen further, but other indicators of household spending appear to have held up. Some indicators of business sentiment have weakened, although they have so far remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth.

The MPC highlighted that its inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has recently been subject to a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks occurs, CPI inflation will return to the 2% target sustainably in the medium term, while minimising undesirable volatility in output.

Posted by MMB Finance Swindon on 17 June 2022