The Bank of England raised interest rates again as it warned that the Ukraine conflict could see strained households hit by double-digit inflation later this year.
Members of the Bank’s Monetary Policy Committee (MPC) voted eight to one to raise rates from 0.5% to 0.75%, marking the third consecutive increase.
The move has now brought rates back to where they were before the pandemic.
In the minutes of the latest decision, the Bank noted that further rate hikes may be needed as it laid bare a bleak inflation outlook, with the Consumer Price Index now set to hit around 8% in the second quarter. .
He said that if wholesale energy prices continue to rise, inflation could rise further by the end of the year and potentially be temporarily “several percentage points higher” than last month’s peak forecast of 7.25%.
“The effects of the Russian invasion of Ukraine would likely accentuate both the spike in inflation and the adverse impact on activity by intensifying the contraction in household income,” the Bank warned.
However, policymakers still believe that inflation will recede sharply after this spike as energy prices stop rising and the cost-of-living crisis weighs on spending.
Experts said the tone of the bank’s minutes suggested it wasn’t so sure more rate hikes were needed, given the impact of cost pressures on growth.
The Bank said the hit from soaring energy costs on household finances, and the knock-on effect on economic activity, will be greater than initially feared, with growth in the UK and around the world ” probably slowing down” in the coming months.
He stressed that the impact on the economy of energy prices and Russia’s invasion of Ukraine is “something that monetary policy could not prevent.”
He said this month’s rate hike is “justified,” with stronger-than-expected growth in January despite the Omicron variant of the coronavirus, with the bank now forecasting an expansion of around 0.75% in the first quarter, above a previous expectation for gross domestic product. (GDP) remains stable.
If economic activity takes a serious turn and uncertainty remains elevated, the case for the MPC to keep the fire going and stop policy tightening would be strong.
Martin Beck, EY Item Club
The labor market has also held up well and is unlikely to weaken as quickly as expected, he added.
But the Bank’s deputy governor, Jon Cunliffe, called for rates to remain unchanged at 0.5% amid fears about the impact of cost-of-living cuts on growth, according to the minutes.
The rate hike comes after the US Federal Reserve raised US interest rates on Wednesday for the first time since 2018 in a bid to cool runaway inflation.
Economist Martin Beck of the EY Item Club said the Bank is likely to put more emphasis on supporting growth than trying to rein in inflation, over which it has little control, “implying a slower rate of increase in rates in the future.
He believes another hike is a “strong possibility” in May, with rates ending the year at 1% to 1.25%.
“But if economic activity takes a serious turn and uncertainty remains elevated, the case for the MPC to stand firm and stop policy tightening would be strong,” according to Beck.