Bank of England’s decision to increase rates comes after Andrew Bailey, the Governor disclosed the growth and inflation forecasts as the policymakers see a positive change for the UK economy in the future
The Bank of England is likely to push its interest rates higher for the 10th time alongside the predictions of inflation becoming more constant in the UK economy. Experts foresee that the central bank would increase its standard lending rate by 4%, which would be the highest rate since 2008. Some economists and investors also anticipate this rate hike, to be the last of its cycle, bringing relief to borrowers. The decision to increase rates comes after Andrew Bailey, the Governor disclosed the growth and inflation forecasts as the policymakers see a positive change for the UK economy in the future.
The governor earlier this month stated that the country could still face a recession, but it could be less severe or “shallower” than anticipated in November. The International Monetary Fund (IMF) on Tuesday gave its forecast of the UK being the only major economy that would fall into recession in 2023, with an expected economic contraction of 0.3 percent.
Jeremy Hunt, British Chancellor conceded the economy’s bleak outlook but claimed that the country’s long-term growth prospects are more favorable. The Bank of England could update its outlook for the economy from the current prediction of a recession lasting for at least eight quarters. An annual update of the economy’s supply potential is yet to be released by the officials along with a survey of wage growth. This could also mean that inflation could continue and would impact increasing wage rates, forcing companies to raise prices.
BOE’s and its persisting efforts to Control Inflation
The Bank of England has increased the interest rates consecutively for more than a year now. The base interest rate was at just 0.1% during December 2021, as officials tried to encourage consumer spending after the pandemic had a hard-hitting effect on the economy. The bank’s decision to bring in measures that would tighten the monetary policies was based on the efforts to bring inflation under control.
The CPI (Consumer Price Index) inflation rate fell slightly to 10.5 percent in December, down from 10.7 percent in November. Financial institutions see the rate hike on Thursday as the final hike in the cycle with a 0.5%-point increase, while other economists estimate another 0.5%-point hike in March.
The money markets, on the other hand, haven’t been fully priced in a hike at this meeting. Investors have reduced their expectations when rates have increased to more than 4% since December. The decision to have interest rate hikes on Thursday would be the fourth half-point hike in the cycle.
Officials have increased the three-quarters of points in November due to the mini-budget introduced by the Liz Truss government creating havoc in the UK economy. Economist also states that the decision to increase rates is crucial as the government would focus more on bringing inflation under control keeping in mind the damage inflation could bring forward.
The Bank of England’s decision follows the US Federal Reserve’s quarter-point rate increase on Wednesday night, which indicated a slowdown in its tightening spree. The European Central Bank later Thursday is expected to raise its key rate by half a point to 3%.