Bank of England raises base rate to 5.25%

The Bank of England took anticipated measures last week by raising rates by 0.25%, bringing the benchmark policy rate to 5.25%. This decision marks the 14th consecutive rate hike and places borrowing rates at their highest level since 2008.

The central bank's objective is to combat inflation, which remains significantly above their 2% target rate.

The GBPUSD rate continued its recent reversal and fell to 1.2650 but rebounded to 1.27 soon after the press conference ended. Against the Euro it slipped back to 1.1550 but retook the 1.16 level again by the end of the day.

Among the members of the monetary policy committee, six voted in favour of a 25bps rate increase, while two members preferred a more assertive 50bps hike. The Policy Report cited certain key factors, especially wage growth, as surprisingly positive, suggesting a potential rise in the medium-term equilibrium rate of unemployment and an increase in broader domestic inflationary pressures.

Governor Bailey implied that further tightening might be necessary, but he also struck a slightly less aggressive tone during the subsequent press conference, mentioning that there were multiple approaches to tackle inflation.

He cautioned that it was too early to determine if the economy was approaching a significant turning point. With the benchmark rate now at 5.25%, speculations are arising about rates potentially reaching 5.75%. Bailey asserted that the central bank would respond if evidence of more persistent inflation emerges and that borrowing costs were likely to remain elevated for some time.

One committee member dissented, advocating for unchanged rates, expressing concerns about the risks of overtightening, which could lead to output losses and volatility requiring abrupt policy reversals.

Looking ahead, market expectations suggest another rate increase of a quarter of a percentage at the next policy meeting on 21st September.

As for growth, the Bank of England does not foresee a recession anymore, but the output is expected to remain sluggish. H1 2023 saw growth at approximately 0.2%, and the central bank anticipates a similar rate of growth in the near future.

These projections are significantly more optimistic than last year's assessments, which predicted eight consecutive quarters of economic contraction beginning in Q4 2022. As a result, the UK, like many other countries, is expected to experience a "softer-than-expected" landing.

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