Highlights
BoE increases Bank Rate to 5% with a 7-2 majority vote.
Uncertainty remains over the magnitude of the rate hike.
UK economy tackles Brexit, pandemic, and gas price surges, with minimal growth expected.
Overview
The Bank of England’s Monetary Policy Committee (MPC) has made a decision to increase the Bank Rate by 0.5 percentage points to 5%. This move was supported by a majority vote of 7-2, with two members preferring to maintain the Bank Rate at 4.5%. The market-implied path for Bank Rate has risen, now averaging around 5.5% due to increases in gilt yields and mortgage rates. The MPC is closely monitoring the impact of previous rate hikes, acknowledging that the full effects may take time to be felt, particularly in the fixed-rate mortgage market.
Growth, Employment, Earnings Rise; Inflation Remains Strong
Business surveys indicate a modest quarterly GDP growth of around 0.25% during the middle of the year, while indicators of household spending have shown some improvement. Employment has seen strong growth, with a 0.8% increase in LFS employment in the three months to April. Average Weekly Earnings (AWE) have risen by 7.6% annually, exceeding expectations, but future growth is expected to ease. CPI inflation fell from 10.1% in March to 8.7% in April and remained at that level in May. Services CPI inflation and core goods price inflation have been stronger than anticipated.
Inflation Outlook: Decline Expected, Stability in Services CPI
Looking ahead, analysts project a significant decline in CPI inflation throughout the year, driven by developments in energy prices. They expect services CPI inflation to remain relatively stable, while anticipating a decrease in core goods CPI inflation later in the year. The MPC’s primary goal is to ensure that CPI inflation returns sustainably to the 2% target in the medium term. The Committee recognizes the potential for second-round effects from external cost shocks to persist longer than they initially emerged. Further tightening in monetary policy may be necessary if there are indications of more persistent inflationary pressures.
MPC Vigilant: Monitoring Indicators for Inflationary Pressures
The MPC will closely monitor indicators like labor market conditions, wage growth, and services price inflation. They aim to identify persistent inflationary pressures and will adjust the Bank Rate accordingly. The goal is to sustainably return inflation to the 2% target in the medium term, aligning with the MPC’s mandate.
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