The Bank of England Raises Interest Rates to Tackle Continual Inflation.

The Bank of England's Monetary Policy Committee (MPC) recently made the decision to increase the Bank Rate by 0.25% to 5.25% in order to control rising inflation. This decision, made on August 2nd, 2023, reflects the bank's determination to meet its 2% inflation target while also supporting economic growth and employment. Projections indicate that the Bank Rate may reach just over 6% and average below 5.5% over a three-year forecast period.

The economy has shown resilience in the first half of the year, with estimated quarterly GDP growth of 0.2%. Strong household income and retail sales volumes have contributed to this growth. However, there are some indicators, such as the July S&P Global/CIPS UK composite PMI, suggesting a potential weakening in the economy. The labor market remains tight, but there are signs of slight loosening, as the unemployment rate rose to 4.0% in the three months leading up to May.

Inflation remains a concern, as the Consumer Price Index (CPI) inflation, though declining from 8.7% in May to 7.9% in June, remains well above the 2% target. Projections expect inflation to decrease further to around 5% by the end of the year due to anticipated lower energy, food, and core goods price inflation. Wage growth has also surpassed expectations, reaching 7.7% in the three months to May, but it is expected to decrease to around 6% by the end of this year.

The MPC predicts that inflation will return to the 2% target by the second quarter of 2025, with a subsequent decrease below the target due to reduced inflationary pressures domestically and internationally. The Committee warns that there are risks to the inflation forecast, with a potential for persistent effects of cost shocks on wage and domestic price inflation.

In conclusion, the MPC remains committed to maintaining price stability. If there are indications of more persistent inflationary pressures, further tightening of monetary policy may be necessary. The Bank Rate will be kept at an appropriate level for a sufficient duration to effectively bring inflation back to the 2% target in the medium term, aligning with the bank's mandate.