Bank of England Announces Higher Interest Rates to Combat Inflation
The Bank of England has made a significant announcement, stating that interest rates will remain higher for an extended period of time in order to tackle persistent inflation. This marks the first time the central bank has taken such a stance.
The latest move to tackle rising prices comes as the Bank revealed another increase in interest rates, pushing them up to 5.25% from the previous 5%. This marks the 14th consecutive increase and brings borrowing costs to a 15-year high.
Despite the predicted slowdown in economic growth, the Bank is confident that the UK will avoid a recession. However, it also indicated that interest rates will not automatically drop once inflation returns to normal levels, signaling a more long-term approach to curbing rising prices.
While inflation had slowed to 7.9% in June, it remains nearly four times higher than the Bank of England’s target of 2%. In response, the Bank’s Monetary Policy Committee has stated that it will maintain a sufficiently restrictive bank rate for an extended period to ensure a sustainable return to the 2% target.
Governor Andrew Bailey expressed optimism about the declining inflation rate, emphasizing the importance of reaching the target. He stated, “Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest, and we need to make absolutely sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”
However, the Bank also acknowledged that it may take slightly longer for inflation to subside. The forecast predicts that inflation will reach the target of 2% between April and June 2025, compared to the previous expectation of the first quarter of 2025.
The Bank maintained its previous guidance that the UK economy will avoid recession. However, sluggish growth is anticipated, with gross domestic product (GDP) forecasted to increase by 0.5% in 2024, potentially an election year, and just 0.25% in 2025.
The succession of interest rate hikes, which began in December 2021, is expected to put more pressure on demand in the coming year. In May, the Bank had projected GDP growth of 0.75% for both 2024 and 2025. It now predicts that GDP growth will remain below pre-pandemic rates for a considerable period of time.