The Bank of England raised interest rates a quarter of a percentage point to 4.5 percent, as it warned it would not reach its inflation target until 2025.
A seven-to-two majority on the central bank’s Monetary Policy Committee said the increase was necessary to bring inflation under control again, with rates raised to the highest level since 2008.
The Bank of England revised its short-term inflation forecasts significantly higher as it admitted that it had previously underestimated the strength and persistence of higher food prices.
Instead of inflation falling below its 2 percent target in a year, as it previously predicted, the BoE now believes it will only hit the target at the start of 2025, after the deadline for the next general election.
It now expects the inflation rate to decline from the current rate of 10.1 percent to 5.1 percent in the last quarter of the year, instead of its previous forecast of 3.9 percent. Any further deterioration in inflation expectations will leave British Prime Minister Rishi Sunak losing his pledge to halve inflation by the end of the year.
However, the Bank now believes that the UK economy will avoid recession relatively comfortably, and predicts that by mid-2026 GDP will be 2.25 per cent larger than projected in February.
The Bank of England believes that food price inflation will no longer lead to higher prices in general within a year. But it now expects that an overall improvement in the economic outlook will mean inflation will be above target later on.
Financial markets expect further increases in the cost of borrowing, with rates peaking near 5 percent.
The Bank of England’s forecast did not contradict these expectations and the Monetary Policy Committee warned that “if there is evidence of further (inflationary) pressure continuing, further tightening of monetary policy will be required”.
It said growth prospects increased not only because of lower energy prices but also because of strong consumer and business confidence and higher public spending in the March budget.
BoE officials stressed that the growth outlook remains weak as annual growth rates struggle to exceed 1 percent over the next three years, while unemployment will rise from 3.8 percent at present to 4.5 percent by 2026.
In the Monetary Policy Report, the Bank of England said the main effects of the interest rate hike from 0.1 percent in December 2021 to 4.5 percent have yet to be felt by households, with only a third of the full impact.
Members of the Monetary Policy Committee who voted to keep interest rates at 4.25 percent, Swati Dhingra and Silvana Tenero, said the lag effect of previous hikes is yet to come. This, they insisted, is likely to push down inflation too much, increasing the need for lower interest rates in the future.