Five interest rate rises in a row from the Bank of England would once have been regarded as strong and determined action to tame inflation. The problem for Threadneedle Street is that the US Federal Reserve rather redefined the definition of decisive measures on Wednesday when it hiked by 0.75 percentage points in one go.
Versus that full-on display of fireworks, the Bank’s quarter-point move to 1.25% felt like a case of turning up with a couple of sparklers. It was a bare-minimum move given that official forecasts now see inflation at 11% in October when consumers’ energy bills go up again. The inflation forecasts get bigger every time the Bank opens its mouth these days. As recently as February – just before Russia’s invasion of Ukraine – the peak was projected to be 7.25%.
The bind, of course, is the weakness of the economy. The minutes of the monetary policy committee’s meeting showed that a fall in GDP in the second quarter of this year is now almost nailed-on – the new forecast is for a fall of 0.3%. The US, by contrast, is still looking at growth. So there is still a plausible argument that slowing demand in the UK will open up a margin of “slack” in the economy, which would do some of the inflation-fighting work. That, at least, is the case for sticking to baby steps on interest rate increases.
It is hard, though, to believe that the Bank can maintain its incremental approach much longer. The split on the committee was 6-3 – the same as last month – with the minority wanting a half-point increase before inflation expectations become embedded. The trio may have lost the vote this month, but they seem to be winning the tussle over language, signalling and direction. The minutes spoke about the Bank being “particularly alert to indications of more persistent inflationary pressures” and being willing to act “forcefully if necessary”. Possible translation: we may have to hurry up.
The pound took the hint and rapidly reversed its knee-jerk fall versus the dollar. The stage is set in August, the date of the next meeting, for a rerun of this month’s debate: should it be 0.25% or 0.5%? Probably the latter: 11% inflation is a seriously alarming number.
