Bank of England raises interest rates by 50bp. Inflation is expected to rise to over 13% in October
The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8-1 to increase Bank Rate by 0.5 percentage points, to 1.75%, only one member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.
Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting.
That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.
The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe, United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.
Domestic inflationary pressures are projected to remain strong over the first half of the forecast period. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rises in their costs.
The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels.
As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.