The Bank of England has opted for a cautious and measured approach by raising interest rates by 0.25 percentage points, reaching a level of 5.25 percent. This decision reflects the bank’s commitment to maintaining economic stability while addressing the persistent challenge of elevated inflation.
It is important to highlight that, despite the decline in inflation, the UK’s inflation rate remains higher than that of other advanced economies such as the US, Japan, and the Eurozone. These economies are gradually moving towards the culmination of their interest rate adjustments.
According to the Bank of England, even if interest rates continue to rise in line with current market expectations, it might take until mid-2025 for inflation to ease from its current 7.9 percent to the Bank of England’s targeted rate of 2 percent. The Monetary Policy Committee has context menu attributes this extended timeline to a developing correlation between wages and prices, heightening the potential for sustained inflationary pressures.
While reiterating its previous position, the bank has introduced new language emphasising its intention to maintain a sufficiently restrictive bank rate over an extended period to steer inflation back to the 2 percent target. Despite the commendable resilience of the economy, the repercussions of higher borrowing costs on economic activity are becoming increasingly evident. Indications of a cooling job market and a rise in unemployment are beginning to surface.
Nevertheless, the Bank of England remains optimistic about steering clear of a recession. It expects a consistent quarterly GDP growth rate of 0.2 percent in the near term, followed by a gradual weakening due to the cumulative effects of higher interest rates. The bank’s projections also indicate a gradual decline in inflation, with an average of 6.9 percent in the third quarter of 2023 and 4.9 percent in the fourth quarter, demonstrating promising progress towards the goal of halving inflation within the year.
The bank’s projection that inflation is likely to fall below 5 percent in the fourth quarter is reassuring news. This aligns with Rishi Sunak’s commitment to achieving a reduction in inflation to 5.4 percent by the end of the year.