Bank of England increases Base Rate to 05%

The Bank of England’s Monetary Policy Committee (MPC) has voted by a majority of 5-4 to increase Bank Base Rate by 0.25 percentage points, to 0.5%.

The members of the committee that voted against actually wanted to increase the rate by 0.5 to 0.75%, so the Doves actually prevailed despite the increase. The MPC also voted in favour of unwinding Quantitative Easing by not reinvesting in government and corporate stock.

12 month CPI inflation increased to 5.4% in December, almost 1% higher than predicted in the November Report.

The Bank expects inflation to increase close to 6% in February and March, before peaking at around 7¼% in April. This projected peak is around 2% higher than expected in the November Report.

The current differential above the medium term inflation target of 2% reflects global energy and tradable goods prices. The further rise in energy futures prices meant that Ofgem’s utility price caps will be be substantially higher at the reset in April 2022.  In addition, core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices.

Projected pressures on CPI inflation are expected to dissipate, as global energy prices are assumed to remain constant after six months, and as global bottlenecks ease and tradable goods prices fall back. Underlying wage growth is also projected to ease from 2023, as the labour market loosens gradually and inflation declines.

Conditional on the rising implied path for Bank Rate and the MPC’s current forecasting convention for future energy prices, CPI inflation is projected to fall back to a little above the 2% target in two years’ time and to below the target by a greater margin in three years.

The MPC will consider beginning the process of actively selling UK government bonds only once the Bank Rate has risen to at least 1% and its preference in most circumstances is to use Bank Rate as its monetary lever on inflation.

The MPC judges that, if the economy develops broadly in line with the February Report central projections, some further Rate increases are likely to be appropriate in the coming months. The Committee continues to judge that there are two-sided risks around the medium-term inflation outlook, primarily from wage developments on the upside and from energy and global tradable goods prices on the downside.

Therefore, as a guide to rates beyond 1%, the answer is still to watch this space.

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