Fears of resurgent inflation have finally caught up with the rate-setters of the Bank of England’s Monetary Policy Committee (MPC). The Bank has voted by eight to one to raise interest rates to 4 per cent. It’s the first rate hike in more than three years, ending a cutting and hold cycle that started in 2024.
So far, the MPC had resisted raising rates because the majority of the committee was not convinced that inflation was baked in or leading to so-called ‘second-order effects’, where retailers raise prices in anticipation of more inflation and employees make precautionary pay rise demands.
That reluctance to raise rates has left Britain’s central bank behind the international curve, given the Fed in America, the European Central Bank and the Japanese central bank have all already hiked their base rates.
Speaking to me on Reality Check last month, Andy Haldane, the Bank’s former chief economist, said he thought the Bank was at risk of moving too slowly on inflation again: ‘I think in normal times you’d weigh both [a growth and an inflation target] and it’s right to weigh both but in an environment which you’ve consistently missed your target for four or five years, you’ve got to say first things first the inflation target is primary. And the growth target is secondary.’
Catherine Mann, the one member who took a different view to the rest of the committee, wanted to see rates increased to 4.25 per cent because ‘a substantial inflation risk premium is in the UK yield curve, reflecting five years of above-target inflation, where it has averaged 4.7 per cent. Therefore, from a risk management and credibility perspective, a 50-basis point hike in Bank Rate is “good policy”.’
If the MPC has been too focused on growth over its principal job of keeping inflation at the 2 per cent target, which is mandated by law, then its focus has now shifted back to inflation given that economic growth outperformed expectations in the first half of this year and unemployment began to fall.
Alongside the interest rate decision, the Bank also released its quarterly Monetary Policy Report. It’s a grim read. The report expects inflation to hit ‘around 5 per cent by the middle of next year’. More worryingly, the MPC expects food inflation – which has stayed low this year – to hit 4.75 per cent in the middle of next year too.
Traders who bet on these things were, this morning, of the overwhelming view that more hikes are coming, with market expectations suggesting four more rises to a peak of 5 per cent towards the end of next year
For his part, Andrew Bailey, the Bank’s governor said at least one more rise would be coming: ‘Today’s increase shouldn’t be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase.’ Bad news for mortgage holders and, indeed, prime ministers who have promised to tackle the cost of living.
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