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Bank of England raises borrowing costs to 15-year peak, signals rates to stay high

2023-08-03 19:24
By David Milliken and Andy Bruce LONDON, Aug 3 The Bank of England raised its key interest rate
Bank of England raises borrowing costs to 15-year peak, signals rates to stay high

By David Milliken and Andy Bruce

LONDON, Aug 3 The Bank of England raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25% on Thursday, and gave a new warning that borrowing costs were likely to stay high for some time.

Unlike the U.S. Federal Reserve or the European Central Bank - which also both raised rates by a quarter-point last week - the BoE's Monetary Policy Committee gave little suggestion that rate hikes were about to end as it battles high inflation.

"The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target," the BoE said in new guidance about the outlook for rates.

"Some of the risks of more persistent inflationary pressures may have begun to crystallise," it added.

British inflation hit a 41-year high of 11.1% last year and has fallen more slowly than elsewhere, dropping to 7.9% in June, the highest of any major economy.

Economists polled by Reuters last week forecast BoE rates would peak at 5.75% later this year. The BoE's own forecasts were based on recent market assumptions - which have now eased somewhat - that rates would peak at over 6% and average nearly 5.5% over the next three years.

"Inflation hits the least well-off hardest and we need to make absolutely sure that it falls all the way back to the 2% target," Governor Andrew Bailey said.

THREE-WAY SPLIT

Policymakers voted 6-3 for the increase, but were split three ways on the decision for the first time this year. Two MPC members - Catherine Mann and Jonathan Haskel - voted for a half-point increase this month, while Swati Dhingra voted for no change, as she has all this year, warning of overtightening.

Markets had seen a roughly one-in-three chance of a bigger increase to 5.5%, which would have repeated June's outsize rise.

The BoE forecast inflation would fall to 4.9% by the end of this year - a faster decline than it had predicted in May.

This will relieve Prime Minister Rishi Sunak, who pledged in January to halve inflation this year, a goal which had looked challenging.

However, the BoE forecasts inflation will be slightly slower to fall from late next year. Inflation does not return to its 2% target until the second quarter of 2025, three months later than it forecast in May.

The BoE said it was incorporating more of the upside risks to inflation which the MPC saw in May into its central or "modal" forecast, despite a bigger-than-expected fall in inflation in June.

Services price inflation - which the BoE said offered a signal on longer-term price trends - was projected to stay high, and wage growth at the end of this year was expected to be 6%, up from May's forecast of 5%.

Wage rises had been a bigger driver of high inflation than companies' profit margins, the BoE said.

The BoE, which noted the economy's recent "surprising resilience", changed its growth forecasts little from three months ago, with the economy due to expand a meagre 0.5% in 2023 and 2024, and just 0.25% in 2025.

The jobless rate is predicted to rise to 4.8% by late 2024, up from a forecast of 4.4% in May and 4.0% in the latest data.

Mortgage costs have hit their highest since 2008, weighing on house-building. The BoE forecast housing investment would fall 5.75% this year and 6.25% in 2024.

(Additional reporting by Suban Abdulla)

((david.milliken@reuters.com))

Keywords: BRITAIN BOE/