Bank of England raises interest rates by 25bps to 5.25%

August 03, 2023 (MLN): The Bank of England (BoE) raised its key interest rate by 25bps to 5.25%, seeking to curb the highest inflation in any major economy, the latest data issued by the BoE showed today.

Notably, this is the 14th consecutive rate hike, taking the interest rates from 0% in December 2021 to 5.25% now, pushing borrowing costs to their highest level since the 2008 financial crisis.

At its meeting ending on August 02, 2023, the MPC voted by a majority of 6–3 to increase Bank Rate by 25bps.

This hike came in line with the expectations, as the majority of market participants were expecting a 25bps increase.

The UK Consumer Prices Index (CPI) rose by 7.9% in June 2023, down from May's 8.7% and from a recent peak of 11.1% in October 2022.

CPI inflation remains well above the 2% target. It is expected to fall significantly further, to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation.

Services price inflation, however, is projected to remain elevated at close to its current rate in the near term

The Committee’s updated projections for activity and inflation are set out in the accompanying August Monetary Policy Report.

These are conditioned on a market-implied path for Bank Rates that rises to a peak of just over 6% and averages just under 5.5% over the three-year forecast period, compared with an average of just over 4% for the equivalent period at the time of the May Report.

The sterling effective exchange rate is around 4% higher than in the May Report.

To note, in the last meeting in June, the BoE raised its key interest rate by 50 basis points to 5%.

In the MPC’s August most likely, or modal, projection conditioned on market interest rates, CPI inflation returns to the 2% target by 2025 Q2. 

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