Bank of England Base Rate hits 4%

Bank of England Base Rate hits 4%

12:24 PM, 2nd February 2023, About A year ago

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The Bank of England Monetary Policy Committee (MPC) today voted by a majority of 7–2 to increase the Base Rate by a further 0.5% to a post credit crisis high of 4%. The two dissenting members voted to freeze the rate at 3.5%.

The US Federal Reserve yesterday increased its rate by only 0.25%, so this may strengthen Sterling in the currency markets and further weaken imported inflation.

With current inflation still running well above the 2% target at 10.5% the Bank of England predicts rates to level out at 4.5% by the middle of the year and fall back to 3.25% in the next three years.

Inflation is likely to have peaked

The Bank of England summary reported: “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.”

Although most major economies’ central banks are still tightening monetary policy the inflationary outlook would indicate that this will ease off in the coming year further reducing the need to shore up Sterling by increasing domestic rates.

Interest rates are expected to start to bite after lag period

The Bank goes on to report: “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.”

Certainly, this would indicate the markets have stabilised after the Truss Premiership and that predictions of 6% plus interest appear for now to be off the table.

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