UK inflation is expected to fall slower than previously thought as food prices remain stubbornly high, the Bank of England stated, as it raised interest rates for the 12th time in a row.
Seven members of the Monetary Policy Committee (MPC) voted to increase the base interest rate to 4.5% from 4.25%.
Food prices have stayed higher for longer than expected, partly due to Russia’s war in Ukraine and poor harvests in some European countries, ramping up the cost of living for households across the UK.
This means Consumer Prices Index (CPI) inflation is expected to decline less rapidly than the bank predicted in its last report in February.
Inflation is still expected to drop sharply from April this year, as energy prices decline and household bills are subsidised, the MPC said.
“There remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target,” it added.
Inflation is expected to decline to 5.1% in the fourth quarter of the year, meaning the government would narrowly hit its target to halve inflation by the end of the year.
The bank had previously thought CPI inflation could fall as low as 1% by the middle of 2024, but it is now predicted to reach around 3.4%.
The hike to the interest rate - which is at the highest level since 2008 - will pile more pressure on borrowers and help the bank to bring inflation down to the 2% target.
But the impact of higher rates has yet to be widely felt for households across the country, partly because many borrowers are tied to fixed-rate mortgages that have not renewed yet.
Meanwhile, economists at the bank released a record upgrade to their economic growth expectations.
They now expect that gross domestic product (GDP) will not fall during a single quarter this year, meaning the economy is not set to decline and the UK could avoid a recession.
In February, the committee believed the economy could fall into a shallow recession starting from the first three months of the year.
Now it expects GDP to rise by 0.25% this year before a 0.75% increase next year and the year after. It had previously forecast a 0.5% fall this year, followed by a drop of 0.25% next year and a 0.25% rise in 2025.
The increase of 2.25 percentage points over the three-year forecast period marked the biggest upgrade since the MPC was formed in 1997.
“The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households,” the report explained.
Nevertheless, higher food and energy prices will continue to disproportionally hit families on lower incomes as the items typically make up a larger share of overall spending, the bank said.
Just two of the nine-member MPC voted to keep interest rates the same at 4.25%.
Luke Bartholomew, senior economist at abrdn, responded: “Forecasts showed some punchy upward revisions to growth expectations, and the bank is no longer formally forecasting a recession, so we continue to think the combination of the monetary tightening already in the pipeline - combined with a sharp US slowdown - will see the UK economy experience recession-like conditions for much of the year.
“However, with inflation proving more resilient that expected, the bank has not been able to pause hikes in the way that some policy makers have been calling for.
”We are still minded to think that today’s hike will be the last of this tightening cycle, but the risks are skewed heavily towards higher rates, and inflation will need to behave itself over the coming months if policy is indeed to remain on hold at these levels.”
Professor Mairi Spowage, director of the Fraser of Allander Institute, said: ”The bank’s outlook for the UK economy has improved considerably since their last set of forecasts were published in February.
”Broadly in line with the Office for Budget Responsibility, they now think that the UK economy will overall be flat in the first half of 2023 before returning to growth in the second half of the year.
”The expectations are still for inflation to fall sharply from April, in part as the high price levels from a year ago come into the comparison - the next data are out on 24 May, so let’s see if the economists are correct this time.”
Paul Hilton, chief executive of ESPC, added: “The latest interest rates hike will most affect those who are on tracker mortgages, who will see an immediate impact on their mortgage repayments after the rate hike, and will also likely see their monthly mortgage payments increase.
“Despite the continuing interest rate rises, we are seeing increasing confidence from mortgage lenders, with a wider range of products available, which is positive news for buyers and sellers alike.
“With the cost of fuel falling and the impact of previous rate hike beginning to take effect, there may however be some good news on the horizon, with some economists suggesting that inflation may well fall to around 8% in April - this in turn may lead the Bank of England to pause any further rate rises.”
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