The Hawks increase interest rates by 0.5%

The Bank of England Monetary Policy Committee (MPC) voted by a majority of 8 – 1 in favour of the Hawks to increase interest rates by 0.5% this month to a Base Rate of 1.75%. This is justified by a near doubling in wholesale gas prices since May, other global commodity price increases and global supply chain issues putting increased pressure on domestic prices.

The Bank of England was put under massive pressure to try and control UK inflation, but can only really affect domestic demand, not world market prices and supply issues. However, a rate rise does underpin the value of Sterling and hence offers some protection against the cost of import inflation.

The Bank is forecasting worse news than expected in the May Report with CPI inflation gaining ground from 9.4% in June to over 13% in the final quarter of 2022 and remaining high throughout 2023, before falling to the 2% target in the medium term/two years ahead.

Having increased interest rates to dampen demand and monetary stimulus, the Bank of England predicts the UK to enter into a technical recession from Q4 this year with real household post-tax spending power falling and consumption growth turning negative in the next year.

The MPC summary said: “The risks around the MPC’s projections from both external and domestic factors are exceptionally large at present.”

“The August Report contains several projections for GDP, unemployment and inflation: a baseline conditioned on the MPC’s current convention for wholesale energy prices to remain constant beyond the six-month point; an alternative projection in which energy prices follow their downward-sloping futures curves throughout the forecast period; and a scenario which explores the implications of greater persistence in domestic price setting than in the baseline. These are all conditioned on announced Government fiscal policies, including the Cost of Living Support package announced in May.

“There are significant differences between these projections in the latter half of the forecast period. However, all show very high near-term inflation, a fall in GDP over the next year and a marked decline in inflation thereafter.”