The Bank of England (BoE) raised its interest rate on May 5 to its highest level in 13 years in response to global inflationary pressures that have increased following Russia’s invasion of Ukraine.
The BoE’s Monetary Policy Committee (MPC) voted six to three to increase its base rate to 1%, with the other three members preferring to increase the rate to 1.25%. The last time the BoE’s base rate was at 1% was in February 2009, when the central bank slashed rates in response to the global financial crisis.
Twelve-month Consumer Price Index (CPI) inflation rose to 7% in March, far higher than the BoE’s 2% inflation target, as global energy and tradable goods prices soared. The central bank expects CPI inflation to reach just over 9% in the second quarter, before averaging more than 10% in the fourth quarter.
To combat rising inflation, analysts expect further rate hikes this year. Deutsche Bank expects one more hike in June followed by another in August to take the base rate to 1.5%, before pausing until February 2023 where another hike will follow to take the rate to 1.75%.
The outlook for economic growth is gloomy. The MPC predicts real UK gross domestic product will contract by 0.2% in 2023 before growing by 0.3% in 2024.
