In its latest announcement, the BOE also projected that the UK would fall into a recession in the fourth quarter of the year, which is expected to last for five quarters. It comes as the Bank revealed its baseline forecast is for GDP to fall by 1.25% in 2023 and 0.25% in 2024.
As a result, at its meeting yesterday (3 August), the BoE Monetary Policy Committee (MPC) voted by a majority of 8-1 to increase the Bank Rate by 0.5%.
Policymakers at the central bank voted to raise the base rate for the sixth time in succession, in line with economists expectations. It said it took the decision due to inflationary pressures in the United Kingdom and the rest of Europe which have “intensified significantly” since the May Monetary Policy Report and the MPC’s previous meeting.
Since May, the price of gas has more than doubled, and the BoE said those price rises will push inflation even higher over the next few months, to around 13%, remaining at elevated levels throughout 2023. This is 3% higher than the expectation at the time of the BoE’s May Report.
Domestic inflationary pressures are projected to remain strong over the first half of the forecast period as firms report an increase in their selling prices. The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels.
However, domestic inflationary pressures are expected to subside in the second half of the forecast period, as the increasing degree of economic slack and lower headline inflation reduce the pressure on wage growth. Global commodity prices are also assumed to rise no further, and tradable goods price inflation is expected to fall back.
Meanwhile, the European Central Bank (ECB) has also recently increased its own key interest rate by 0.5% for the first time in 11 years and plans further rises this year, but the overall rate remains much lower at 0.0%.