LONDON — The Bank of England on Thursday hiked interest rates by 50 basis points and dialed back some of its previous bleak economic forecasts.
The Monetary Policy Committee voted 7-2 in favor of a second consecutive half-point rate hike, taking the main Bank rate to 4%, but indicated in its decision statement that smaller hikes of 25 basis points may be in the cards in coming meetings. The two dissenting members voted to leave rates unchanged.
Crucially, the Bank also dropped the word “forcefully” from its rhetoric around continuing to raise rates as necessary to rein in inflation. It sees a forthcoming easing in the annual Consumer Price Index:
“Annual CPI inflation is expected to fall to around 4% towards the end of this year, alongside a much shallower projected decline in output than in the November Report forecast,” the Bank said.
“In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼% in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2% target in the medium term.”
However, the MPC noted that the labor market remains tight and domestic price and wage pressures have been stickier than expected, suggesting risks of “greater persistence in underlying inflation.”
U.K. inflation came in at 10.7% in December, down slightly from the previous month’s 41-year high of 11.1% as easing fuel prices helped to ease price pressures. However, high food and energy prices continue to squeeze U.K. households and drive widespread industrial action across the country.
Improved economic outlook
The Bank on Thursday revised its economic outlook to forecast a shorter and shallower recession than previously set out in the November projections.
The economy is now expected to contract slightly throughout 2023 and the first quarter of 2024 as energy prices remain high and rising market interest rates restrict spending. Four-quarter GDP is expected to have fallen by 0.3% up to the first quarter of 2023, and is projected to contract by 0.7% by the first quarter of 2024, compared to the 2% forecast in November.
The Bank previously forecast that the U.K. economy was entering its longest recession on record, but GDP unexpectedly grew by 0.1% in November after also exceeding expectations in October, suggesting that the impending recession may not be as long or as deep as previously feared.
However, the International Monetary Fund on Monday downgraded its projection for U.K. GDP growth in 2023 to -0.6%, making it the world’s worst performing major economy, behind even Russia.
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