The Bank of England (BoE) has announced that the Monetary Policy Committee has voted to raise interest rates from 0.25% to 0.5%.
Inflation is continuing its upward trend, driven principally by price rises in energy, food, and tangible goods. The Bank’s forecast is that inflation will peak at 7.25% in April once the energy price cap increases by 54%. This will be the highest inflation seen since the early nineties.
The Bank of England is expecting inflation to fall back by the middle of the year, with an expectation that the 2% long term target will be achieved in two years.
Interest rates are the monetary policy lever that can be used to curb or accelerate inflation. Due to the levels of inflation shown above, the Bank has agreed to raise interest rates to 0.5%.
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This is following an original increase to 0.25% in October 2021. Analysts are expecting these rises to be the start of a series looking to bring inflation back to its 2% target. This may signal the end of the low interest rate environment seen since the financial crisis of 2008.
Inflation is a key concern for households when wage growth fails to keep apace, which was the case at the turn of the year. The Bank is optimistic, expecting strong wage growth over 2022. This, however, may lead to an increase in the unemployment level toward 5%.
Overall, the Bank of England is feeling relatively optimistic, but it is worth noting that several risks remain entrenched in the global economy over the medium term. The geopolitical stresses, freeing of supply bottlenecks and the ability of employers to peg pay to inflation, all remain unclear.
The inflationary pressure that the Bank is acting upon illustrates why IGD’s Shopper Confidence Index have slumped to historic lows in January.
Source: IGD
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