The Monetary Policy Committee (MPC) of the Bank of England (BoE) has raised this Thursday interest rates in the United Kingdom from 5% to 5.25%, its highest level in 15 years, in its mission to reestablish the 2% inflation target. At its meeting that ended on August 2, 2023, the MPC voted by a majority of 6 to 3 to increase the bank rate by 0.25 percentage points or a quarter point. Two members preferred 0.5 percentage points, up to 5.5%, while another of the governors voted to keep rates at the 5% level they were at.
During the first half of the year, underlying quarterly Gross Domestic Product (GDP) growth has been approximately 0.2%. “Bank officials expect this growth rate to remain similar in the near term due to more resilient household income and retail sales volumes, as well as surveys showing positive results in recent months. However, there are signs of adorers recent reports that indicate economic weakening, including the S&P Global/CIPS Purchasing Managers’ Index for July,” the agency stresses.
Although the labor market remains tight, there are signs of easing. The EPA (Active Population Survey) unemployment rate increased to 4.0% in the three months to May, slightly exceeding previous expectations from the May report. “The relationship between vacancies and unemployment continues to decline, although it is still above historical averages. Regular wages in the private sector increased by 7.7% in the three months to May, significantly exceeding expectations,” it says.
Twelve-month Consumer Price Index (CPI) inflation rose from 8.7% in May to 7.9% in June, below the Committee’s previous expectations. Within this index, core inflation for goods and services was lower than expected, according to the bank, “although the news on persistent inflationary pressures was less worrisome.” CPI inflation for June remained in line with the projections in the entity’s May report.
“Importantly, CPI inflation remains well above the 2% target. It is expected to decline significantly to around 5% by the end of the year, mainly due to lower inflation in energy prices and, in to a lesser extent, food and basic goods. However, service price inflation is expected to remain elevated in the near term, close to its current rate,” the central bank added in its statement.
The US Federal Reserve (Fed) and the European Central Bank (ECB) raised rates by a quarter of a percentage point last week, but unlike the Bank of England (BoE), markets believe they are at or near the end of the end of its rate adjustment cycle. Mortgage costs have reached their highest level since 2008, weighing on home construction. The BoE started raising rates in December 2021, before other major central banks.
