Bank of England hikes rates for fourth consecutive time, signals future caution

LONDON – The Bank of England has raised its benchmark rate for the fourth time in as many meetings of its policymakers, but has signaled that it should act cautiously in the coming months as concerns grow over a slide towards recession for the world’s fifth largest economy.

Like the US, the UK has seen a spike in consumer prices since the start of 2021, due to rising energy costs and supply chain bottlenecks. In response, the UK central bank first raised its key rate in December, while the Federal Reserve announced its first decision in March.

In a statement on Thursday, the BOE raised its key rate to 1% from 0.75%. This means the central bank has raised borrowing costs at four consecutive meetings of its monetary policy committee, a streak not seen since the late 1990s.

Six MPC members voted for a rate increase to 1%, while three voted for a larger increase to 1.25%.

The central bank also said it has instructed its staff to prepare a plan to sell some of the bonds it has purchased under its past stimulus programs. This plan should be presented in August, but the bond sales would start later.

However, the central bank has indicated that it will likely raise rates more slowly, if at all, in the coming months as skyrocketing energy prices following Russia’s invasion of Ukraine are expected to reduce household purchasing power and weaken economic growth.

In its statement, the BOE said further hikes in its key rate “may still be appropriate” in the coming months, but added that two of its policymakers were not in favor of this direction and instead thought that it was likely that the policy rate would remain at 1%.

“There were risks on both sides of this judgment,” the BOE said.

This greater caution contrasts with the Fed, which on Wednesday approved a rare half-percentage-point hike in interest rates within a target range of 0.75% to 1%. Fed Chairman Jerome Powell told a press conference that officials were broadly in agreement that additional half-point hikes might be warranted in June and July given the conditions. current economies.

One reason for the BOE’s caution is that there are already signs of a slowdown in consumer spending, with a larger share of household income being eaten up by rising energy costs.

UK consumers were hit last month by a 54% rise in home energy prices. The BOE said it expects energy bills to rise another 40% when the price cap is reviewed again in October.

If this increase occurs, the BOE expects the annual inflation rate to average 10% over the last three months of the year, reaching highs not seen since 1982. Because rising prices energy caused by Russia’s invasion of Ukraine will not reach households until October, inflation in the UK is expected to peak later than in other countries.

But in addition to pushing inflation higher, this rise in household energy prices is expected, according to the BOE, to further weaken household spending, leading to a drop in gross domestic product of around 1% in the last quarter of the year. The BOE said it expects real after-tax household disposable income to fall 1.75% in 2022. That would be the biggest drop since 2011 and the second-largest since the series began in 1964.

Stores are already seeing the pressure on household incomes. Retail sales fell 1.4% in March, after falling 0.5% in February. Surveys also recorded a sharp drop in consumer confidence, a key measure revealing that households are more pessimistic about the economic outlook over the next 12 months than they were during the global financial crisis. of 2008.

The BOE does not expect two consecutive quarters of economic contraction, a widely accepted definition of a recession. Instead, he expects the economy to stagnate in 2023, with GDP falling by 0.25%. The BOE was previously expecting growth of 1.25%.

The BOE has pushed back the expectations of financial market players, who see the key rate rising to 2.5% by mid-2023. If that were to happen, the BOE said inflation would be well below its 2% target in three years, at 1.3%. Starting rates at 1% would lead to inflation just above 2% by mid-2025, the BOE said, indicating that it expects more modest rate increases than financial markets have expected.

Write to Paul Hannon at paul.hannon@wsj.com

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