The Bank of England raised its benchmark interest rate by a quarter point on Thursday, after a half percentage point hike last time, citing persistence of high inflation.
In a three-way split, the nine-member Monetary Policy Committee decided to lift the bank rate to 5.25 percent, the highest since early 2008. This was the fourteenth consecutive rate hike.
Six members including Governor Andrew Bailey voted for a 25 basis points hike, while Jonathan Haskel and Catherine Mann preferred to raise the rate by 50 basis points and Swati Dhingra called for no change.
A majority of members said the monetary stance was weighing on economic activity but a quarter-point increase in Bank Rate at this meeting was necessary to address the risks from greater inflation persistence.
Regarding guidance, the bank said “The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.”
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the bank said.
Suggesting that policymakers have turned more hawkish, the bank said recent wage growth data highlights some of the risks from more persistent inflationary pressures may have begun to crystallize.
Although the BoE is keeping all its options open on future rate hikes, another increase in September seems highly likely, ING economists said.
Another 25 basis point action in November largely depends on whether service inflation has failed to slow, but base case for now is that 5.50 percent in September will mark the peak for the bank rate, ING economists added.
Capital Economics economist Paul Dales said the rates will stay at their peak for a year. The next big surprise may be how fast rates fall in late 2024 and 2025, Dales added.
The BoE expects inflation to fall significantly to around 5.0 percent by the end of the year. However, services price inflation is projected to remain elevated at close to its current rate in the near term.
But going forward, the BoE said inflation will return to the 2 percent target by the second quarter of 2025.
On wages, the bank said the near-term outlook for regular pay growth is uncertain. Still the MPC expects pay growth to fall to around 6 percent by the end of this year.
In the monetary policy report, the bank projected GDP growth to be 0.5 percent this year and in 2024 and to ease to 0.25 percent in 2025.
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