Bank of England raises rates by 25 basis points and sees no more recession on the horizon

Bank of England raises rates by 25 basis points and sees no more recession on the horizon

The Bank of England raised its key interest rate by a quarter of a percentage point to 4.5% on Thursday, and its head, Andrew Bailey, said the British central bank would “go its own way” in an effort to contain the fastest inflation among the world’s largest economies.

The Bank of England is no longer forecasting a recession after it revised its gloomy growth forecasts that were released in February, the biggest improvement since they were first released in 1997.

However, the Bank of England now expects inflation, which remained above 10% in March, to decline more slowly than it had hoped, mainly due to unexpectedly strong and sustained increases in food prices. He also saw stronger wage growth than previously thought.

“We must go our own way to make sure that inflation returns to the target level of 2%,” he said. Andrew Bailey at the start of the press conference.

A Reuters poll last week showed that most economists expected a quarter percentage point rate hike in May, which would take it to its highest level since 2008, and then they expected the Bank of England to keep rates unchanged thereafter.

However, investors are betting on further rate hikes by the British central bank shortly after the next decision, forecasts for the level of interest rates indicated that they would reach a peak of 5% this autumn.

“If there are signs of more sustained pressures, then further tightening of monetary policy will be required,” the Bank of England said, maintaining the same guidelines for future action as they did in February and March.

“Inflation data will be scrutinized over the next few months and could be a source of market volatility, especially in the foreign exchange market, as the pound sterling is now factoring in more aggressive action from the BoE compared to other central banks,” said abrdn Senior Economist. Luke Bartholomew (Luke Bartholomew).

Members of the Monetary Policy Committee (MPC) voted 7 to 2 in favor of a rate hike in May, in line with economists’ expectations in a Reuters poll. Committee members Silvana Tenreiro (Silvana Tenreyro) and Swati Dhingra (Swati Dhingra) once again expressed their negative attitude towards further tightening of monetary policy.

The Bank of England was the first major central bank to start raising borrowing costs in December 2021, but critics accuse it of not being bold enough as inflation hit a four-decade high, peaking at 11.1% in October.

Last week, the US Federal Reserve and the European Central Bank raised their base rates by 25 basis points. While the Fed chairman Jerome Powell hinted at a pause, ECB President Christine Lagarde said it was too early to talk about a halt to rate hikes.

The UK’s high inflation problem is in large part due to its heavy reliance on natural gas imports for electricity generation, making it especially vulnerable to a surge in energy prices exacerbated by the start of Russia’s NWO in Ukraine last year.

Energy prices have now fallen sharply and the Bank of England expects inflation to fall to 5.1% by the end of this year from 10.1% in March. However, this is a smaller decline than the 3.9% forecast in February, and the Bank of England predicts that inflation will not return to its 2% target until early 2025.

The Bank of England noted that higher forecasts for food prices added about 1 percentage point to future inflation compared to February.

Most members of the Bank of England Monetary Policy Committee saw “substantial” upside risks to inflation forecasts, and inflation is now forecast not to come much closer to the target in the coming years, even if the central bank’s rate rises by another quarter of a percentage point or more.

The Bank of England is concerned that the recent strong overall wage growth could turn into a long-term problem for the economy, and on Thursday it forecast much stronger wage growth and lower unemployment than three months ago.

“Wage rates could stabilize above those in line with the 2% inflation target over the medium term,” the Bank of England said.

Chief Economist at the Bank of England Hugh Pill (Huw Pill) said last month that British businesses and individuals have been forced to admit that their incomes have fallen on an inflation-adjusted basis, drawing criticism from unions and some former Bank of England officials.

The Bank of England predicts that the economy will grow by 0.25% this year, compared with the February forecast, which assumed its contraction by 0.5%.

Cheaper energy, fiscal stimulus and improved business and consumer confidence mean that the Bank of England is no longer forecasting a recession this year and expects the economy to grow 2.25% year-over-year in three years.

The state budget, presented in March, is expected to increase output by about 0.5% in the coming years.

The Bank of England estimates that about a third of past interest rate hikes have been for households and businesses, a slower pass-through than in previous tightening cycles due to the higher proportion of homeowners with fixed-rate mortgages.

Bailey said the economic impact of previous BOE rate hikes has been “a very lively subject of debate” among MPC members.

Vivek Paul (Vivek Paul), chief UK investment strategist at the BlackRock Investment Institute, said investors’ focus in light of Thursday’s decision will not be so much on the 25 basis point increase, but on what happens next.

“We are in a new mode where central banks face a tougher choice between supporting growth and controlling inflation; in the case of the Bank of England, this issue is particularly acute,” Paul wrote in a note on Thursday.

“The recent relative resilience in the growth picture has two interpretations: a favorable one, which suggests that the economy is showing resilience to the impact of rate increases, and a pessimistic one, which suggests that the full measure of deferred damage has not yet materialized,” Paul said.

Paul suggested that the Bank of England may be forced to keep rates higher for a long time. This opinion was supported by Hussein Mehdi (Hussain Mehdi), investment strategist at HSBC Asset Management.

“In the context of sustained economic activity, we believe there is a good chance that the bank rate will peak at 5% by the August meeting. No rate cuts are expected until the end of 2024, while the Fed may move to cut rates later this year,” Mehdi said.

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