On Thursday, the Bank of England raised its benchmark interest rate to 4.5% from 4.25%, as expected. In a monetary policy report released at the same time, the BoE also sharply revised upward its expectations for economic growth — meaning the country is expected to avoid falling into recession.
The BOE has raised interest rates 12 times in a row, starting in December 2021. According to the announcement, the BOE’s Monetary Policy Committee approved the rate hike by a 7–2 vote, which was also in line with market expectations. The two members who voted against it preferred to keep the rate at 4.25%.
While the rate hike itself is in line with expectations, the final direction is becoming increasingly murky. Similar to the Fed, the Bank of England’s wording is also quite ambiguous. The U.K.’s monetary policymakers said they will continue to watch closely for signs of continued inflationary pressures, and if there is evidence of more persistent pressures, further tightening of monetary policy will be needed.
According to the CME “Bank of England Watch” tool, after the resolution, traders are betting that the U.K. policy rate will peak in September, with an implied rate of 4.95% on swap prices.
As a policy backdrop, the U.K. inflation rate remains at a high double-digit percentage. The Bank of England said that inflation grew at a rate of 10.2% in the first quarter of this year, higher than expected at the time of the March rate meeting. The reasons for the inflation beat were mainly focused on core commodity and food prices. While private sector wage growth and services CPI also increased, the path was largely in line with expectations.
At the same time as the May resolution was announced, the Bank of England also released its latest monetary policy report, and the core focus of outside attention remained on inflation expectations and economic growth (GDP) expectations.
The Bank of England said that inflation in the U.K. has remained at around 10% since last summer, well above the 2% policy target.
In its May monetary policy report, however, the BOE expects the country’s CPI to fall rapidly from April. On the one hand, this is due to last year’s high base, and on the other hand, the extension of the UK government’s energy security policy, overlaid with lower wholesale energy prices, will both reduce the contribution of energy bills to inflation figures. On the other hand, inflation in food prices and some core commodity prices are showing more stubbornness, so the May report expects a slower pace of downward inflation than the policy report in February this year.
The Bank of England’s latest judgment is now that inflation is likely to fall back to around 5% by the end of this year, and that inflation will continue to fall in 2024 and hit the 2% policy target by the end of next year. The Bank of England specifically stressed that this does not mean that prices will fall, they just won’t rise as fast. In the long term, CPI will bottom out at around 1% in 2025.
At the monetary policy conference, while Bank of England Governor Bailey continued to say that “inflation risks are trending upward”, he also mentioned that there are good reasons to believe that inflation will fall rapidly from April.
In terms of GDP expectations, the Bank of England no longer expects the UK to enter recession this year. The updated monetary policy report expects the UK’s GDP growth to be roughly flat in Q1 and Q2 this year, and revised upward to 0.9% and 0.7% in 2024 and mid-2025. According to media statistics, this is also the Bank of England Monetary Policy Committee has the largest margin of GDP upward revision.
The Bank of England may raise interest rates further in the future against the backdrop of continued inflationary pressures and easing economic growth pressures. The Bank of England said on the 11th that it will raise interest rates further in the future if necessary. Market institutions expect that the Bank of England will continue to raise interest rates 1–2 times in the future.
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