The Bank of England raised interest rates for the 12th time in a row on Thursday after UK inflation remained stubbornly in double digits.
Policymakers raised the central bank’s key rate by 4.5 percentage points to 4.5%, the highest since 2008. A long period of aggressive policy tightening continues as the UK experiences higher inflation than the US and Western Europe. Consumer prices rose 10.1% year-on-year in March as food prices rose faster than expected along with prices of other commodities, the latest data showed.
The central bank’s meeting minutes this week said the rate hike would address “the risk of stronger domestic price and wage-setting strengths.”
UK inflation is expected to fall more slowly than the central bank had predicted three months ago, largely because food price inflation is expected to decline more slowly. Food prices rose nearly 20% year-on-year in March, the fastest pace of inflation in more than 45 years.
Headline inflation, which includes food and energy prices, is expected to ease to 5.1% by the end of the year, according to central bank forecasts. Data for April, due later this month, are expected to show inflation starting to slow further sharply as rising household utility bills are excluded from annual inflation calculations. A year ago, household utility bills soared by more than 50% as wholesale prices soared due to the Ukrainian war.
The Bank of England is trying to push inflation down to its 2% target, but economic news could complicate the bank’s mission. Three months ago, when the central bank last released its outlook, it was particularly pessimistic about the UK economy, expecting five quarters of contraction and a mild recession. On Thursday, the bank announced its biggest ever upward revision to its economic outlook, citing falling wholesale energy prices and additional government fiscal stimulus. We no longer expect an economic contraction in any quarter.
Rather than a recession, this better-than-expected growth, accompanied by falling unemployment and rising consumer confidence, could make some of the inflationary pressures in the economy last longer than previously thought.
Still, an improved economic outlook will provide only limited comfort to households and businesses. Forecasts are weak. The central bank forecasts that the economy will grow by about a quarter percent this year.
