BoE raises rates by 25bp, points out risks from wage growth
By Alexander Bueso
Date: Thursday 03 Aug 2023
(Sharecast News) - The Bank of England raised official short-term interest rates by 25 basis points and noted that some of the risks from more persistent inflationary pressures may have begun to crystallise.
"The Committee continues to judge that risks around the modal inflation forecast are skewed to the upside, albeit by less than in May, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices take longer to unwind than they did to emerge," rate-setters said in their policy statement.
Bank Rate was hiked by 25bp to 5.25% with six of the Monetary Policy Committee's members voting for the increase, two arguing for 50bp and one for no change.
Economists had been divided as to whether the BoE would raise rates by 25 or 50 basis points.
It also said that its new economic forecasts were premised on a market-implied path for interest rates to a peak of just over 6% and for an average rate of just under 5.5% over the next three months.
At the time of its May projections the average implied level of Bank Rate stood at 4.0%.
Sterling had also appreciated by 4% since May.
Twelve-month CPI was running below its forecast at the May previous meeting, the BoE added, but the downside in services prices had been smaller than in goods and CPI inflation was in line with the May projections.
Earnings growth meanwhile was seen declining from 7.7% over the three months to May to around 6% by year end, but at present was "materially" above the May projections.
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," 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, in line with its remit."
"Ultimately, the MPC's next steps will be determined by the flow of data, and we see upside risk to the MPC's forecast that the unemployment rate will remain below its estimate of the equilibrium rate, 4.25%, until Q2 2024-as well as downside risk to its forecast that CPI inflation will moderate only to 6.9% in Q3; our forecast is 0.1pp lower," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
"Accordingly, we continue to think that the MPC will raise Bank Rate by just 25bp in September, and that this will be the last increase in this tightening cycle."
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