The Bank of England (BoE) has raised its bank rate by 0.25 percentage points to 4.5%, in a move to mitigate persistent inflationary pressures, according to the Monetary Policy Committee's (MPC) report published on May 10, 2023.
The MPC voted 7-2 in favour of the rate increase, with two members advocating for the previous rate of 4.25%. The committee's projections suggest the bank rate will reach around 4.75% in Q4 2023 before settling to just over 3.5% by the end of the forecast period.
The rate increase comes amidst an upside trend in the near-term outlook for global activity, with UK-weighted world GDP expected to grow moderately throughout the forecast period. Despite certain risks, the global banking sector's tightening credit conditions are anticipated to have a minimal impact on GDP barring any further shocks.
UK GDP is expected to remain flat in the first half of this year, though underlying output – excluding the impact of strikes and an extra bank holiday – is projected to grow modestly. Factors such as stronger global growth, lower energy prices, fiscal support from the Spring Budget, and a potential drop in household saving due to a tight labour market are contributing to an improved economic outlook.
The unemployment rate is forecast to remain below 4% until the end of 2024 before gradually rising to around 4.5%. The MPC report noted that while there are signs of the labour market loosening, it is expected to remain tighter than previously reported in February.
CPI inflation was recorded at a higher than expected 10.2% in Q1 2023, largely due to increases in core goods and food prices. Inflation is projected to decline sharply from April, with the extension of the Energy Price Guarantee and reductions in wholesale energy prices expected to lessen household energy bills' contribution to CPI inflation.
However, the committee's expectation for CPI inflation now falls back slower than anticipated in the February report due to food price inflation and news in other goods prices. As such, the MPC estimates CPI inflation will decrease to just above 1% at the two and three-year horizons, significantly below the 2% target.
Monetary policy will strive to return CPI inflation to the 2% target sustainably in the medium term as it continues to address domestic price and wage setting risks. As uncertainties around the global financial and economic outlook remain elevated, the MPC pledged to continue closely monitoring persistent inflationary pressures.
Should evidence of more persistent pressures emerge, the MPC indicated that further tightening in monetary policy would be required. The MPC will adjust the Bank Rate as necessary to meet its 2% inflation target in the medium term, in line with its remit.