On the back of a rapid rise in prices since the start of the Russo-Ukraine war, the Bank of England (BOE) has had to raise its key policy rate 15 consecutive times, bringing the rate from almost 0% in early 2020 to 5.25% today. The inflation rate rose from just under 2% to over 11%, which is significantly higher than the Bank's target of 2%.
Price pressures came from quite a few areas that are a key part of the basket of goods that the average household consumes on a daily basis. The main items are food and energy:
All indications point to the possibility of rates increasing further. At its most recent monetary policy meeting on 21 September 2023, the Bank decided in a split vote (5-4) to keep rates unchanged. It is important to note that four of the 9 committee members voted for a 0.25% increase which would have put the rate at 5.5%. In the bank's press release they hinted at the possibility of rates increasing further, they mentioned that:
The Committee had continued to judge that the risks around the ... inflation forecast were skewed to the upside, albeit by less than in May, reflecting the possibility that the second-round effects of external cost shocks on inflation in wages and domestic prices take longer to unwind than they did to emerge. Since the MPC’s previous meeting, global growth has evolved broadly in line with the August Report projections..... Spot oil prices have risen significantly, while underlying inflationary pressures have remained elevated across advanced economies.— Bank of England
Judging by the statements it seems the BOE is taking a wait-and-see approach because of the recent slowdown in inflation, but is leaning towards more increases as there are early signs of a significant increase in oil prices.
There are more clues in the previous - August 2023 - monetary policy report so let's take a look. In the previous report, the Bank did mention that they expect inflation to decline substantially as we approach the end of the year (about 5% by year-end). Inflation has fallen to 6.7% recently so they are on track to meet this target with 3 months remaining in the year, so not unexpected. In the same report, the bank highlighted a few important forecasts:
The Bank has also provided some estimates of future policy rates which signal some consensus about where rates are heading
|||2023 Q3||2024 Q3||2025 Q3||2026 Q3|
|Most Likely CPI Inflation||6.9%||2.8%||1.7||1.5|
|Interest Rates (Bank Rate)||5.3%||6.0%||5.2%||4.5|
As you can see from the information provided, interest rates could potentially hit a high of 6.0% in 2024, before climbing down to 4.5% by 2026. Inflation on the other hand is expected to drop substantially to below the Bank's target by 2025.
With interest rates staying higher for longer, there are a couple of things that should be high on the agenda: