Bank of England says inflation will hit 11% after raising interest rates to 13-year high – business live

Bank: Inflation will hit 11% in October

The Bank of England has raised its inflation forecast again, and now predicts it will hit 11% this autumn, when energy bills rise.

It had previously estimated that consumer price inflation would hit 10% – far over its 2% target. This new forecast shows that households face even more pain, with real wages already lagging inflation.

Announcing today’s interest rate rise to 1.25%, the Bank says:

CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October.

The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.

The Bank explains the surge in inflation is partly due to rising global energy – greatly exacerbated by the war in Ukraine – and other tradable goods prices.

But there are also domestic factors, including “the tight labour market and the pricing strategies of firms”.

Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months.

In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.

Updated at 08.19 EDT

The latest Bank of England base rate rise will place a further squeeze on mortgage borrowers, as Grianne Gilmore, Head of Research at Zoopla, explains:

”This rise in rates will translate into higher mortgage costs for those looking to buy a home. For buyers with a 30% deposit buying an average priced home (£250k) in the UK, a quarter point rise in mortgage rates this will add hundreds (£264) to their annual mortgage bill.

Most homeowners will be protected from the current raft of interest rate rises as three quarters of those with outstanding mortgages are on fixed-rate deals.

Rate hike is “latest signal that UK house prices will cool”

Rising UK interest rates will dampen the housing market, making it more expensive to repay a mortgage.

Tom Bill, head of UK residential research at estate agents Knight Frank, says today’s rate hike is the is latest signal that UK house prices will cool:

“The latest interest rate rise will accelerate the process of normalisation taking place in the UK housing market.

“Unlike other parts of the economy, we don’t expect decades-old records to be broken in the property market and prices will continue to drift back down to earth after the distortions of the pandemic.”

A graph of UK mortgage rates and house price growth Photograph: Knight Frank

Knight Frank says there was an increase in house sellers in May, with some people keen to get their house on the market before the market peaked.

The Bank of England has highlighted the weakness of sterling — pointing out it has fallen 2.5% since its last meeting in early May.

The minutes of its meeting explain:

Sterling had been particularly weak against the US dollar.

According to market participants, the recent movements had in part reflected the rising yield differential between shorter-term government bond yields in the United States compared to those in the United Kingdom, and perceptions of the UK growth outlook.

A weaker currency pushes up cost of imports, such as fuel, as Simon Nixon of The Times highlights:

Rupert Harrison, an economist and portfolio manager at financial services company BlackRock, has warned the UK may already be in recession and the situation “may get worse” in the autumn.

He spoke with the BBC’s World At One programme following news that the Bank of England had raised interest rates to 1.25% from 1%, the highest since January 2009.

Mr Harrison, who was also an adviser to George Osborne during his time as Chancellor, said (via PA Media):

“I think that for the Bank of England, I have a lot of sympathy for them, they face a very acute and difficult trade-off.

“We may already be in recession in the UK. It’s very very likely now that the second quarter is going to see negative growth [as the Bank predicts].

“We may get some mechanical bounce back in the third quarter, partly for complicated reasons due to the Jubilee holiday.

“But effectively growth is around zero and may get worse as we head into the autumn, particularly with energy prices going back up.”

Hetal Mehta, senior European economist at Legal & General Investment Management (LGIM), also thinks UK interest rates could leap to 1.75% in August.

By the August meeting, the Bank of England will have new economic forecasts for growth and inflation, plus a scheduled press conference to outline its thinking.

Mehta writes:

“The Bank of England finds itself between a rock and a hard place. The rock comes in the form of other central banks accelerating their plans in the face of high inflation, while the hard place is the deteriorating growth backdrop, with UK GDP growth at or below zero over the last 3 months.

“With this context in mind, it is our view that the Bank will hike rates by 50 basis points at its next meeting, when the change in gear can be communicated via updated forecasts and the press conference.

Full story: Bank of England raises interest rates to 1.25%

The Bank of England has raised interest rates for a fifth time in succession to tackle an inflation rate that is heading towards 11% amid soaring household energy bills, our economics correspondent Richard Partington writes.

In a move widely expected by City economists, the Bank’s monetary policy committee (MPC) voted by a majority to increase its key base rate by 0.25 percentage points to 1.25% in response to living costs rising at the fastest annual rate for four decades.

It also said it was ready to “act forcefully” if required, signalling further rate rises in the coming months.

In a downbeat assessment as the central bank attempts to navigate a narrow path between flatlining economic growth and surging inflation, Threadneedle Street now expects the economy to shrink in the second quarter while a further rise in household energy bills is expected to push inflation above 11% in October.

In a split decision, a minority of three members of the nine-strong MPC pushed for a larger, 0.5-point rise, amid growing unease over persistently high inflation as central banks around the world launch aggressive rate hikes to combat the rising cost of living.

The US Federal Reserve announced a 0.75-point rate rise on Wednesday – the largest single rise since 1994.

Reflecting fears about the rising cost of living as the Covid pandemic and Russia’s war in Ukraine drive up global energy prices, the MPC said it was ready to launch a tougher response to inflation remaining above its target rate of 2%.

The committee would be particularly alert to indications of more persistent inflationary pressures, and would, if necessary, act forcefully in response.

Here’s the full story:

Updated at 08.38 EDT

ING: Bank could raise by 50 basis points in August

ING Developed Markets Economist James Smith predicts that the Bank of England could raise interest rates sharply in August.

He says it’s ‘entirely possible’ that the MPC lifts rates by 50 basis points, to 1.75%, at its next scheduled meeting.

That would be twice the typical rate rise of 25 basis points, and the biggest increase since 1995.

ING’s Smith writes that while the hawks at the Bank were outvoted 6-3, they have secured a noticeably more hawkish policy statement, including the pledge to act forcefully if cost pressures become more persistent.

“It’s pretty clear that the hawks are nervous about the 8% fall in the pound versus the dollar we’ve seen so far this quarter. Big picture, this is unlikely to change the inflation story dramatically, but the hawks know this is one of the few things the Bank can influence in an environment of rising dollar input prices.

“That means a 50bp move is still entirely possible in August. That’s what markets are pricing, and by then we’re likely to have had another 75bp hike from the Fed, both of which might just be enough to tip the balance narrowly in favour of the hawks.

Here’s some analysis of today’s interest rate decision, from James Smith of Resolution Foundation:

The Bank of England has estimated that Rishi Sunak’s £15bn cost of living support package could boost GDP by around 0.3% and raise CPI inflation by 0.1 percentage points in the first year.

But there are ‘upside risks’ around these estimates given the targeted and front-loaded nature of some of the measures.

Updated at 08.12 EDT

The Bank of England has an increasingly difficult balancing act, as it tried to get a grip on inflation without causing more damage to the economy.

Oliver Blackbourn, portfolio manager, Janus Henderson says:

While central banks are clearly struggling to deal with inflation surges around the world, the Bank of England looks in a particularly tricky situation. Just as [Fed chair] Jay Powell has all but admitted that the Fed will likely cause a recession, the BoE has been much more open about this in its economic forecasts.

The UK looks more “stagflatory” than other major regions, with higher current inflation, expectations for a more prolonged surge in prices, and weaker forecasts for economic growth over 2023. There has been a collective global policy mistake from central banks but, despite reacting sooner than most, the UK looks to be in one of the worst positions.

Markets continue to expect a series of larger moves over the next few meetings. However, with one of the committee’s biggest hawks, Michael Saunders, leaving in August, predictions over voting will likely become more muddied after the next meeting unless others become more vocal in their opinions.

Updated at 08.01 EDT

Charles Hepworth, investment director at GAM Investments, says the Bank’s commitment to act “forcefully if necessary” is “a little laughable”.

The necessity is already here, with inflation expected to peak at 11%, but the Bank knows that growth is slowing, so they cannot act as forcefully as they may proclaim.

Updated at 08.02 EDT

IG: Bank looks like timid cat compared with the Fed

The Bank of England looks cautious and timid compared to its counterparts at the Federal Reserve, which unleashed a 75-basis point hike in rates last night.

So says Chris Beauchamp, chief market analyst at IG Group, who isn’t convinced that the Bank’s pledge to “act forcefully” will convince the markets.

Once again the BoE looks like the timid cat next to the Fed’s roar against inflation, with just a 25bps hike.

Accompanying comments about being prepared to act ‘forcefully’ on inflation will do little when the actual evidence shows the committee remains broadly cautious. A 6-3 vote on 25bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more.

Updated at 08.00 EDT