BOE’s fourth rate rise, but caution ahead

The UK’s central bank seeks to tame inflation fuelled by Russia’s invasion of Ukraine, but it also fears a slowing economy.

Governor of the Bank of England Andrew Bailey expects the economy will stagnate next year but is cautious of further rate rises. Picture: Frank Augstein/AFP

The Bank of England raised its key interest rate for the fourth time in as many meetings of its policy makers, but signalled that it is likely to move cautiously in coming months as worries grow over a slide into recession for the world’s fifth-largest economy.

As in the US, the UK has seen a surge in consumer prices since early 2021, driven by higher energy costs and supply-chain bottlenecks.

In response, the UK’s central bank first raised its key interest rate in December, while the Federal Reserve announced its first move in March.

In a statement Thursday, the BOE raised its key rate to 1 per cent from 0.75 per cent.

That means the central bank has increased borrowing costs at four straight meetings of its Monetary Policy Committee, a sequence unmatched since the late 1990s.

The central bank also said it has asked its staff to prepare a plan for selling some of the bonds it bought as part of its past stimulus programs.

That plan is set to be outlined in August, but bond sales would start later.

However, the central bank indicated that it is likely to raise rates more slowly, if at all, in coming months, with the very high energy prices that have followed Russia’s invasion of Ukraine set to squeeze household spending power and weaken economic growth.

In its statement, the BOE said further rises in its key rate “may still be appropriate” in coming months, but added that two of its policy makers didn’t support that guidance and instead thought it likely the key rate would stay at 1 per cent.

“There were risks on both sides of that judgment,” the BOE said.

That greater caution is a contrast with the Fed, which Wednesday approved a rare half-percentage-point interest-rate increase to a target range between 0.75 per cent and 1 per cent.

US Fed Chairman Jerome Powell said at a news conference that officials broadly agreed that additional half-point increases could be warranted in June and July given current economic conditions.

One reason for the BOE’s caution is that there are already signs of a slowdown in consumer spending as larger shares of household income are eaten up by higher energy costs.

UK consumers were last month hit with a 54 per cent increase in home energy prices. The BOE said it expects energy bills to rise by a further 40 per cent when the ceiling on prices is reviewed again in October.

If that increase happens, the BOE expects the annual rate of inflation to average 10 per cent over the final three months of the year, reaching highs not seen since 1982.

Because the energy price rises caused by Russia’s invasion of Ukraine will only reach households in October, UK inflation is set to peak later than in other countries.

The BOE doesn’t expect two straight quarters of economic contraction, a widely accepted definition of recession.

Instead, it expects the economy to stagnate in 2023, with GDP declining 0.25 per cent.

The BOE had previously forecast growth of 1.25 per cent.

The BOE pushed back against the expectations of participants in financial markets, who see the key interest rate rising to 2.5 per cent by mid-2023.

– The Wall Street Journal