London Daily

Focus on the big picture.
Saturday, Feb 22, 2025

Bank of England hints rates near peak after 10th hike

Bank of England hints rates near peak after 10th hike

The Bank of England signalled the tide was turning in its battle against high inflation after it raised interest rates on Thursday for the 10th meeting in a row, prompting investors to prepare for the end of its run of higher borrowing costs.

The BoE's interest rate setters voted 7-2 to push Bank Rate to 4.0% - its highest since 2008 - from 3.5%. The move had been expected by most investors and economists polled by Reuters.

Like other central banks such as the U.S. Federal Reserve and the European Central Bank, which raised rates on Wednesday and Thursday respectively, the BoE is trying to smother the risks from an inflation rate that is way above its target.

But it is also worried about aggravating what is expected to be the worst recession among big rich economies this year.

It said its rate hikes going back to December 2021 were likely to become an increasing drag on the economy, helping to bring inflation down to about 4% by the end of this year. Previously the BoE had forecast 2023 inflation at around 5%.

"We've seen the first signs that inflation has turned the corner," Governor Andrew Bailey told reporters after the rate hike. "But it's too soon to declare victory just yet, inflationary pressures are still there."

The Monetary Policy Committee (MPC) would need to be "absolutely sure" that inflation was receding, he said.

The MPC said further interest rate hikes would hinge on evidence of more persistent price pressures.

Previously the BoE had said it would "respond forcefully, as necessary" to signs of further inflation pressure, and that "further increases in Bank Rate may be required".

Investors now think the BoE will raise rates once more, to 4.25% in March, and then keep rates steady, in contrast to expectations before the meeting that it would probably raise rates twice more this year to reach 4.5% by June.

Sterling fell sharply against the U.S. dollar while British government bonds chalked up their biggest daily gains since October.

Bailey said labour market data would be key for understanding how quickly inflation falls. Current pay settlements giving average raises of 6% were a concern, but there were signs that they would fall later this year.

Alexander Batten, a bond portfolio manager with Columbia Threadneedle Investments, said recent data suggested that a sharp weakening of the labour market was coming "but we suspect this may not come soon enough to prevent one final 25 basis-point hike in March".

Martin Beck, an economist with forecasters the EY ITEM Club, said the peak in Bank Rate had probably now been reached given the weak outlook for the economy, and rate cuts could occur by the end of the year.

The BoE's announcement came a day after the U.S. Federal Reserve slowed the pace of its rate hikes with a quarter-point move but said it expected further increases would be needed. The European Central Bank raised rates by a half a percentage point on Thursday to 2.5% and signalled at least one more increase.

The BoE was less clear about its intentions. It said inflation would fall from above 10% now to below its 2% target in just over a year's time.

But it also warned that the risk that inflation could overshoot its forecasts was the biggest since the MPC was formed in 1997 because of persistent labour market pressures and higher-than-expected core and domestically generated inflation.

BoE Deputy Governor Ben Broadbent stressed to reporters that while Britain appeared to have turned a corner on inflation, that was not a comment about Bank Rate hitting its peak.


SHALLOWER RECESSION


The BoE said Britain remained set for a recession but it was likely to be "much shallower" than previously feared due mostly to lower energy prices and weaker market interest rate expectations.

The economy was now seen contracting by 0.5% in 2023 compared with the 1.5% shrinkage forecast in November.

Britain's economy was forecast to shrink by 0.1% during the current quarter, starting a recession which would last five quarters - rather than eight forecast in November - and reducing economic output by a modest 1%.

The BoE saw output still shrinking in 2024 and barely growing in 2025.

Finance minister Jeremy Hunt has promised measures to revive growth in a budget on March 15, ahead of a national election expected next year.

Responding to the BoE decision, Hunt said he would ensure budget measures did not delay the fall in inflation.

The International Monetary Fund this week said Britain's economy would shrink by 0.6% this year while all the other Group of Seven nations were likely to grow.

Britain has been hit hard by the energy price surge after Russia's invasion of Ukraine as it relies heavily on gas for power generation.

It has also suffered a fall in the size of its workforce after the pandemic and post-Brexit restrictions on European Union workers. Unlike other countries, that fall in so-called labour market activity has not yet reversed in Britain.

The BoE said Britain's lack of workers, combined with low business investment and weak productivity growth, meant the economy could probably only grow by about 0.7% a year in 2024 and 2025 without generating inflationary heat.

Before the pandemic, the potential growth rate was about 1.7%.

The BoE saw Britain's economy still below its pre-pandemic size until after 2025, representing seven lost years for growth.

Newsletter

Related Articles

0:00
0:00
Close
UK Prison Officer Sentenced for Inappropriate Conduct with Inmate
Good News: Senate Confirms Kash Patel as FBI Director
Officials from the U.S. and Hungary Engage in Talks on Economic Collaboration and Sanctions Strategy
James Bond Franchise Transitions to Amazon MGM Studios
Technology Giants Ramp Up Lobbying Initiatives Against Strict EU Regulations
Alibaba Exceeds Quarterly Projections Fueled by Growth in Cloud and AI
Tequila Sector Faces Surplus Crisis as Agave Prices Dive Sharply
Residents of Flintshire Mobile Home Park Grapple with Maintenance Issues and Uncertain Future
Ronan Keating Criticizes Irish Justice System Following Fatal Crash Involving His Brother
Gordon Ramsay's Lucky Cat Restaurant Faces Unprecedented Theft
Israeli Family Mourns Loss of Peace Advocate Oded Lifschitz as Body Returned from Gaza
Former UK Defense Chief Calls for Enhanced European Support for Ukraine
Pope Francis Admitted to Hospital in Rome Amid Rising Succession Speculation
Senate Republican Leader Mitch McConnell, at the age of 83, Declares His Retirement.
Whistleblower Reveals Whitehall’s Focus on Kabul Animal Airlift Amid Crisis
Politicians Who Deliberately Lie Could Face Removal from Office in Wales
Scottish Labour Faces Challenges Ahead of 2026 Holyrood Elections
Leftwing Activists Less Likely to Work with Political Rivals, Study Finds
Boris Johnson to Host 'An Evening with Boris Johnson' at Edinburgh's Usher Hall
Planned Change in British Citizenship Rules Faces First Legal Challenge
Northumberland Postal Worker Sentenced for Sexual Assaults During Deliveries
British Journalist Missing in Brazil for 11 Days
Tesco Fixes Website Glitch That Disrupted Online Grocery Orders
Amnesty International Critiques UK's Predictive Policing Practices
Burglar Jailed After Falling into Home-Made Trap in Blyth
Sellafield Nuclear Site Exits Special Measures for Physical Security Amid Ongoing Cybersecurity Concerns
Avian Influenza Impact on Seals in Norfolk: Four Deaths Confirmed
First Arrest Under Scotland's Abortion Clinic Buffer Zone Law Amidst International Controversy
Meghan Markle Rebrands Lifestyle Venture as 'As Ever' Ahead of Netflix Series Launch
Inter-Island Ferry Services Between Guernsey and Jersey Set to Expand
Significant Proportion of Cancer Patients in England and Wales Not Receiving Recommended Treatments
Final Consultation Launched for Vyrnwy Frankton Power Line Project
Drug Misuse Deaths in Scotland Rise by 12% in 2023
Failed £100 Million Cocaine Smuggling Operation in the Scottish Highlands
Central Cee Equals MOBO Awards Record; Bashy and Ayra Starr Among Top Honorees
EastEnders: Four Decades of Challenging Social Norms
Jonathan Bailey Channels 'Succession' in Bold Richard II Performance
Northern Ireland's First Astronaut Engages in Rigorous Spacewalk Training
Former Postman Sentenced for Series of Sexual Offences in Northumberland
Record Surge in Anti-Muslim Hate Crimes Across the UK in 2024
Omagh Bombing Inquiry Concludes Commemorative Hearings with Survivor Testimonies
UK Government Introduces 'Ronan's Law' to Combat Online Knife Sales to Minors
Metal Detectorists Unearth 15th-Century Coin Hoard in Scottish Borders
Woman Charged in 1978 Death of Five-Year-Old Girl in South London
Expanding Sinkhole in Godstone, Surrey, Forces Evacuations and Road Closures
Bangor University Announces Plans to Cut 200 Jobs Amid £15 Million Savings Target
British Journalist Charlotte Peet Reported Missing in Brazil
UK Inflation Rises to 3% in January Amid Higher Food Prices and School Fees
Starmer Defends Zelensky Amidst Trump's 'Dictator' Allegation
Zelensky Calls on World Leaders to Back Peace Efforts in Light of Strains with Trump
×