MercoPress. South Atlantic News Agency

Bank of England raises main rate to 4%, but anticipates a shallower recession

“Annual CPI inflation is expected to fall to some 4% towards the end of this year, alongside a much shallower projected decline in output,” the Bank said.

The Bank of England Monetary Policy Committee on Thursday voted 7-2 in favor of hiking interest rates by 50 basis points with the main rate now at 4%. However the MCP indicated in its statement that smaller hikes and an eventual end to the hiking cycle may be in the cards in coming meetings. The two dissenting members voted to leave rates unchanged at this meeting.

“Annual CPI inflation is expected to fall to around 4% towards the end of this year, alongside a much shallower projected decline in output than in the November Report forecast,” the Bank said.

“In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼% in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2% target in the medium term,” pointed out MPC.

However MPC also noted that the labor market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of “greater persistence in underlying inflation.”

UK inflation reached 10,5% in December, down slightly from the 10.7% of November, as easing fuel prices helped to ease price pressures. However, high food and energy prices continue to squeeze U.K. households and drive widespread industrial action across the country.

But the Bank on Thursday also revised its economic outlook to forecast a shorter and shallower recession than previously set out in the November projections.

The economy is now expected to contract slightly throughout 2023 and the first quarter of 2024 as energy prices remain high and rising market interest rates restrict spending. Four-quarter GDP is expected to have fallen by 0.3% up to the first quarter of 2023, and is projected to contract by 0.7% by the first quarter of 2024, compared to the 2% forecast in November.