“Keep the course” is the order given by Governor Andrew Bailey. The Bank of England continues the fight against double-digit inflation, and for this reason yesterday it raised interest rates by 25 basis points to 4.5%, the highest level since 2008. It is the twelfth consecutive hike since December 2021, when interest rates were at 0.1%.
The knot of inflation
The tweak was widely expected after the latest inflation data, which remains stubbornly high at 10.1%. The rate is not only over five times the Bank’s planned level, it is also the highest of all advanced economies. Inflation is 7% in the Eurozone and 4.9% in the US. “We have to stay on course to get inflation back to the 2% level,” Bailey said, but that won’t happen until 2025. The BoE has revised its estimates and now expects inflation to fall to 5.1% and not 3.9% by the end of the year.
The warning: other possible increases
However, the governor made it clear that if inflationary pressures do not ease yesterday’s increase in interest rates may not be the last. Some economists expect a further hike in June and believe rates could hit 5% before resuming a downward trajectory. “Another tweak or two is entirely possible,” said Paul Dales, UK chief economist, Capital Economics. Then there will be a stalemate that will last until the first half of 2024 before we go back to cutting».
Others, on the other hand, predict that the BoE could leave rates unchanged at their current level. “We believe this hike is the last of the cycle,” said Luke Bartholomew, senior economist, abrdn. However, the risk is of further increases and therefore in the coming months the inflation data will have to be monitored carefully and will continue to generate volatility on the markets, including currency ones».
The food hub
Inflation remained at high levels mainly due to the surge in food prices, which rose by 18.2% in March. Great Britain imports about 50% of the food it consumes and price trends in the coming months are difficult to predict.