A path near the Bank of England (BOE) in London, England, on Thursday, March 18, 2021.
Holly Adams | Bloomberg | Good pictures
LONDON – The Bank of England raised interest rates by 25 basis points on Thursday and revised its economic forecasts to avoid the possibility of a UK recession this year.
The monetary policy committee voted 7-2 in favor of a quarter-point hike to take the key bank rate from 4.25% to 4.5%, as the bank reiterated its commitment to contain stubbornly high inflation.
The Consumer Price Index (CPI) rose 10.1% year-on-year in March, driven by persistently high food and energy bills. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, rose 5.7% in the 12 months to March, unchanged from February’s annual rise and reiterating the risk the bank worries about.
The MPC no longer expects the UK economy to enter recession this year, according to updated growth forecasts in the accompanying monetary policy report. UK GDP is expected to be flat in the first half of the year, growing by 0.9% in mid-2024 and 0.7% in mid-2025. The country’s new GDP print will be released on May 12.
With energy costs falling and fiscal stimulus announced in the government’s spring budget, the economy has so far shown surprising resilience in improving the outlook.
The MPC now estimates, “Although still subdued by historical standards, the path of demand will be materially stronger than expected in the February report.”
“There is upside news to the near-term outlook for global activity, with UK-weighted world GDP now expected to grow at a moderate pace throughout the forecast period,” the MPC said in its May monetary policy statement.
“Risks remain, but, without further shocks, there will be only a modest impact on GDP from the tightening of credit conditions related to recent global banking sector developments.”
Inflation slows down
Inflation is expected to fall sharply from April, with large price rises following Russia’s full-scale invasion of Ukraine eroding the annual comparison. An extension of the government’s energy price guarantee and a further fall in wholesale energy prices are removing some inflationary pressure.
However, the MPC has forecast inflation to ease to 5.1% by the end of the year, compared to the previous estimate of 3.9%. It is still expected to fall by more than 1% over the two- and three-year horizons, “below the 2% target.”
“The Committee continues to judge that the risks surrounding the inflation forecast are substantially skewed to the upside, reflecting the possibility that the second-round effects of external cost shocks on wages and domestic price inflation will take longer to unwind than to emerge,” MPC said.
“If there is evidence of continued pressures, further tightening of monetary policy will be required.”