Bank of England increases key interest rate by 50 bps to 4%

Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom. Wholesale gas prices have fallen recently, and global supply chain disruption appears to have eased amid a slowing in global demand, Bank of England’s MPC said in a media release today.

UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report. The labour market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output. Given the lags in monetary policy transmission, the increases in Bank Rate since December 2021 are expected to have an increasing impact on the economy in the coming quarters.

“Near-term data developments will be crucial in assessing how quickly and to what extent external and domestic inflationary pressures will abate. As set out in the accompanying February Monetary Policy Report, the MPC’s updated projections show CPI inflation falling back sharply from its current very elevated level, of 10.5 per cent in December, in large part owing to past increases in energy and other goods prices falling out of the calculation of the annual rate. Annual CPI inflation is expected to fall to around 4 per cent towards the end of this year, alongside a much shallower projected decline in output than in the November Report forecast,” the MPC said in the release.

In the latest modal forecast, conditioned on a market-implied path for bank rate that rises to around 4.5 per cent in mid-2023 and falls back to just over 3.25 per cent in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2 per cent target in the medium term.

Fibre2Fashion News Desk (KD)