Bank of England increases interest rate for 14th time in a row to 5.25%
Latest forecasts from the Bank say the UK will avoid recession and suggest the government is likely to meet its pledge to halve inflation by the end of the year but interest rates will have to remain higher for longer.
The Bank of England has raised interest rates for the 14th successive time, lifting its official rate to 5.25%.
The quarter percentage point increase was somewhat smaller than some economists had expected, following the release of lower-than-anticipated inflation data last month.
“Inflation is falling and that’s good news,” said the Bank’s governor Andrew Bailey.
“We know that inflation hits the least well off hardest and we need to make absolutely sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”
However, while the Bank’s forecasts do not imply a recession in the coming years, they paint the picture of an economy which is both weaker than previously forecast and effectively flatlining all the way through to 2026.
Rate rises ‘are having an effect’
In an interview , Mr Bailey acknowledged higher interest rates were “difficult” for many – but defended hiking them as necessary to bring down inflation.
He said: “It is tough, and I’m very conscious of that… I’m very, very aware that this is difficult for households. But we’ve got to get inflation back down to target.
“I think it will come down quite substantially by the end of the year – it won’t be back to target, we’ve got more to do next year, and we will do it, but it’s on the way down now.”
Mr Bailey said it was “too early” to make predictions about when rates would be lowered, but said the Bank had several choices over how to achieve its 2% target. Options included keeping rates at the current level for several years, or by raising and then lowering them in a shorter timespan, he said.
The governor said: “Interest rates are having their effect… They are restricting inflation, bringing it down.”
On wage setting, Mr Bailey added: “It’s not consistent currently with the 2% target, because we’re not at the 2% target at the moment. It’s going to need to come down.”
While the Bank itself does not deliver its own interest rate forecasts, it dropped a heavy hint that it does expect borrowing costs to stay high for some time, saying in the minutes to its policy meeting that: “The [Monetary Policy Committee] would ensure that Bank Rate was sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with its remit.”