The Bank of England raised interest rates for a 10th consecutive time on Thursday, by half a percentage point, as policymakers kept up their vigilant stance against inflationary pressures.
The bank’s policymakers lifted the key rate to 4 percent, the highest since 2008. But after more than a year of rising interest rates, inflation in Britain and several other major economies appears to have peaked, and the bank’s officials softened their tone on the future path of rate increasesas the economy heads into a contraction.
In recent policy meetings, officials have said they would act “forcefully” against signs of persistent inflationary pressures. Crucially, the mention of “forceful” was no longer in the minutes of the bank’s meeting this week.
Instead, the bank said “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” according to the minutes of the meeting published on Thursday.
Still, the bank stressed the battle against inflation wasn’t won. Even though the overall rate of inflation may have peaked at a 41-year high late last year, it remains stubbornly elevated, at an annual rate of 10.5 percent in December.
Recent data also showed inflation in the services sector and wage growth still rising faster than expected, increasing concerns that underlying inflation will be persistently high. Meanwhile, food inflation was still rising, hitting a 45-year high of 16.8 percent in December. The bank forecasts overall inflation to fall to 4 percent by the end of the year, double the central bank’s target, and said the risks are that it overshoots by even more.
The European Central Bank, too, is expected to raise rates on Thursday as it continues to battle inflation. This week, data showed that the annual rate of inflation for the 20 countries that use the euro fell to 8.5 percent in January, from 9.2 percent the previous month but core inflation, which excludes volatile energy and food prices, held firm.
On Thursday, the Bank of England also updated its forecasts for the economy, presenting a much less dismal outlook than it had three months ago.
In 2023, the bank expects the economy to shrink by half a percentage point, instead of the 1.5 percent contraction it forecast in November. While the contraction is expected to last five quarters from now, it’s a much milder recession than previously expected because of lower wholesale natural gas prices, the expectation that the central bank won’t have to raise interest rates as high as previously anticipated, and unemployment rising less than previously forecast giving consumers more confidence to spend.
But the outlook still can’t be described as good. The British economy isn’t expected to reach it’s prepandemic size before 2025, which is as far as the bank’s forecasts go.
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