The Bank of England raised interest rates by half a percentage point at the Monetary Policy Committee’s June meeting. Although the news of the increase came as no surprise to most market watchers, the scale of the rise ruffled feathers.
- Rates rose from 4.5% to 5%
- UK CPI remained stubbornly high
- The MPC hinted at the likelihood of further tightening
The Bank of England (BoE) raised interest rates by half a percentage point at the Monetary Policy Committee’s (MPC’s) June meeting. Although the news of the increase came as no surprise to most market watchers, the scale of the rise ruffled feathers. The BoE’s key base rate – its 13th consecutive upward move – now stands at 5%, reaching its highest level since October 2008.
“Bringing inflation down is our absolute priority” (BoE Governor Andrew Bailey
In a letter to the Chancellor of the Exchequer, BoE Governor Andrew Bailey stated: “Bringing inflation down is our absolute priority”. Inflationary pressures are proving slow to unwind: the UK’s annualised rate of consumer price inflation remained unchanged in May at 8.7%, compared with the BoE’s rolling target of 2%. Although headline inflation is expected to “fall significantly” this year, core inflation is likely to remain a challenge, having reached 7.1% in May – its highest level since March 1992.
The MPC’s decision was not unanimous: seven members voted for the 50 basis point increase, while two members voted for no change. The move sparked fresh concern over the possibility of recession, which the UK economy has managed to avoid so far, posting growth of 0.1% in the three months to April.
The MPC believes that the full impact of its current tightening cycle has not yet fed through to the wider economy. Looking ahead, it warned: “If there were to be evidence of more persistent (inflationary) pressures, then further tightening in monetary policy would be required”.
