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Bank of England Raises UK Interest Rates to 4.5%

The Bank of England has raised interest rates by a quarter of a point to 4.5% as it forecast inflation would stay higher for longer than previously expected and the economy would perform more strongly.

The Bank’s monetary policy committee (MPC) voted by a majority for a 12th successive increase in borrowing costs, continuing its most aggressive rate-hiking cycle since the 1980s in an attempt to dampen UK inflation which remains in double

UK rates are at the highest level since October 2008, when the global economy was in the grips of the financial crisis.

Inflation is expected to remain higher for longer than previously forecast. The headline rate of UK inflation has been stubbornly high in recent months – and was 10.1% in March, according to the latest official data. That is the highest rate in the G7 group of advanced economies, and well above the Bank’s official inflation target is 2%.

The Bank now expects inflation at the end of the year to be above 5%, compared with below 4% it forecast in February. That is because of high food prices, which have increased at their fastest annual pace since 1977, and a resilient jobs market.

“Let me be clear, inflation remains too high,” The Bank of England governor, Andrew Bailey, said in a press conference after the decision. “We have to stay the course to make sure inflation falls all the way back to the 2% target.

“We are acutely aware of how difficult this rise in food prices is for people and especially for those people on lower incomes. We do see that food price inflation will start to slow.”

The MPC forecast suggests Rishi Sunak would just about meet his target to halve inflation by the end of the year.

Threadneedle Street said the UK economy was now on course to avoid a recession this year despite intense pressure on households from the largest annual rise in living costs in 40 years.

With consumer spending holding up better than expected, the MPC said business confidence was also improving – helped by a sharp decline in wholesale energy prices over recent months and government support announced at the budget in March. The MPC said the UK economy would also feel little impact from recent turbulence in the US banking sector after the collapse of three medium-sized banks in as many months.

The Bank of England had been warning in the autumn that the UK economy was heading for its longest recession on record, forecasting eight quarters of falling gross domestic product.

However, despite issuing its largest ever growth upgrade, the rate-setting panel said on Thursday the economy would barely expand in the first half of this year. Forecasting near flatlining levels of activity as high inflation weighs on demand, it said the economy would grow by just a quarter-point this year and remain below 1% for at least the next two years.

“It’s a very big upward revision, but the level of growth is still very … it’s still weak, let’s be honest,” Bailey said.

Seven of the nine members of the MPC – including the governor – voted for the rate increase, judging that continued action was warranted to prevent high rates of inflation from becoming entrenched as the economy performed more strongly than expected.

Two members – Swati Dhingra and Silvana Tenreyro – voted to hold rates at 4.25%, warning that the full impact of previous increases were yet to be felt by households and businesses.

Bailey said: “The rise in bank rates since December 2021 will weigh more on the economy in the coming quarters and the MPC factors this into its policy decisions.”

The decision comes after the US Federal Reserve raised its benchmark rate by a quarter-point to a range of 5% to 5.25% last week. The European Central Bank also raised its key interest rate by a quarter-point to 3.25%.

Publishing the minutes of its rate decision, the MPC said it was “important to continue to address the risk of more persistent strength domestic price and wage setting”. While there were signs of the labour market losing steam, unemployment had not risen by as much as feared and wage growth remained strong – adding to inflationary pressures.

About 1.3 million households are expected to reach the end of fixed-rate mortgages before the end of this year, with millions more expected to face higher borrowing costs next year as they come to the end of cheaper deals.

In a suggestion that high inflation was persisting in part because of companies pushing up prices to protect profit margins, the Bank said energy and food prices were likely to come down more slowly than they had risen. It comes as trade union leaders and consumer groups have said that profiteering by companies risks “greedflation” becoming entrenched in the British economy – whereby companies use the cover of high inflation to push up prices.

The Bank said its network of agents across the country had found falling costs at some companies were “not automatically being passed through to consumer prices in an attempt to rebuild [profit] margins”.

Source : TheGuardian