The Bank of England has raised interest rates to 4% from 3.5%. Seven members of the Bank of England’s Monetary Policy Committee (MPC) voted to increase the base interest rate from 3.5% to 4%, with two voting to keep it unchanged.
The MPC also softened its language, removing a promise to act “forcefully” to return inflation to its target level.
“Looking further ahead, the MPC would adjust the Bank rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit,” the minutes of the meeting said.
The Bank of England has predicted a recession of five consecutive quarters with gross domestic product (GDP) falling by 0.5% this year, a shorter and shallower drop than previously thought.
The Bank said that the recession will see peak-to-trough GDP drop by 1%, compared to a previous forecast of a 3% drop.
GDP was expected to have risen by 0.1% in the final quarter of last year, and will contract in all four quarters of this year and the first quarter of 2024.
The 0.5% GDP drop forecast for the 2023 calendar year is a reduction of one percentage point from the MPC’s November forecast.
Output will not return to pre-pandemic levels until 2026, the Bank thinks.
But some experts think the Bank is heading towards the end of its cycle of rate hikes, bringing some potential relief to strained borrowers. Markets expected the Bank’s monetary policy committee (MPC) to raise interest rates to 4% on Thursday, from the previous rate of 3.5%.
But the tide could be set to turn imminently, with some economists suggesting the decision will mark the penultimate base rate rise.
The decision comes after Bank governor Andrew Bailey provided some optimism for the future of the UK economy as he insisted the country has turned a corner on rising inflation. He said earlier this month that while Britain still faces a recession, it could be “shallower” than previously expected, indicating a less severe downturn.
On Tuesday, the International Monetary Fund (IMF) predicted the UK will be the only major economy to plunge into recession this year, with the economy set to contract by 0.3%. Chancellor Jeremy Hunt acknowledged the grim forecast but insisted the UK’s long-term prospects for growth are more promising.
It means the Bank could upgrade its outlook for the economy on Thursday from the current forecast of a recession lasting eight quarters – which would be the longest since reliable records began in the 1920s. The length and extent of the contraction could be shortened in the Bank’s estimations.
The Bank has been raising rates successively for more than a year. In December 2021 the base rate stood at just 0.1% as policymakers tried to encourage consumer spending after Covid slowed the economy.
Efforts to control inflation and bring it back down to the Bank’s 2% target has led the Bank to tighten monetary policy since then.
However, the UK’s consumer prices index (CPI) inflation rate slipped slightly to 10.5% in December, down from 10.7% in November and 11.1% in October, suggesting the measure has now passed its peak.
Deutsche Bank suggested Thursday would mark the MPC’s final “forceful” hike in the tightening cycle with a 0.5 percentage point increase.
Societe Generale Global Economics suggested the same, but said it expects another 0.5 percentage point hike in March before coming back down.
The SocGen economists said: “Even though the outlook is less gloomy than expected only three months ago, we still think a recession is likely and the MPC’s forecasts should continue to predict one for this year.
“This, and the mounting evidence of some cooling in the labour market, vacancies and job growth in particular, should lead the committee to contemplate an imminent end to tightening.”
