Interest Rate Roundup: Bank of England Raises Rates for 11th Consecutive Time Following February Inflation Data

On Thursday 23 March, the Bank of England raised interest rates for the 11th consecutive time following the release of February’s inflation data days before. The move was backed by Chancellor Jeremy Hunt, who warned that inflation was at "dangerous" levels and that inflated prices were "eroding family budgets." The Bank’s Monetary Policy Committee – responsible for deliberating on the benchmark rate – supported a quarter-point increase that saw rates rise to 4.25%. By increasing the cost of borrowing, central banks reduce the amount of money people and businesses can spend; this helps slow down the demand for goods and services, helping to combat inflation. The Bank of England’s target for inflation is 2%, meaning the current level is five times higher. It is also higher than the inflation in all other G7 countries.

Days before the rate rise, figures released by the Office for National Statistics revealed that the annual rate of consumer price inflation rose to 10.4% in February, exceeding forecasts. The ONS attributed the rise to a surge in alcohol prices in pubs and restaurants. Food and non-alcoholic drink prices also increased by 18.2%, the highest level in over 45 years. These upward price movements are impacting numerous businesses, a notable case being popular pub chain, JD Wetherspoon. The chain relies on a high volume, low price business model – a model less possible to maintain with price increases now becoming necessary to offset the inflated costs it pays to its suppliers. Management was forced to raise prices by 7.5% in February, and the business is now only eking a small profit.

Comparative consumer price inflation. Source: the Office for National Statistics and Harmonised Index of Consumer Prices (HICP) from Eurostat

Threadneedle Street was uncertain about the future direction of monetary policy.  Market participants are betting on a final interest rate hike, potentially reaching 4.5% by summer's end, while some economists suggest that rate rises could cease due to recent banking system instabilities and the persisting risk of a recession.

Despite the uncertainty, the Monetary Policy Committee has revised its inflation forecast, anticipating a steeper decline in the coming months, thanks to the recent drop in global energy prices and the government's extension of the Ofgem energy price cap. Another positive development is that wage growth in the private sector, which has been a significant worry for the central bank as it could fuel persistent inflation, has started to ease. Moreover, the Bank said that the reopening of China is expected to have a deflationary impact on advanced economies as it will ease the pressure on global supply chains. Until recently, China operated a stringent ‘zero-COVID’ policy; the policy is now easing significantly, reducing its hindrance to manufacturing. Increased production and relaxed custom rules will shift the supply curve rightwards, reducing prices and thereby inflation.

New data released on Friday 24 March adds to this more positive outlook. GfK, a research company, found that consumer confidence is on the uptick. Customer sales are now at pre-COVID levels again, with the Office for National Statistics reporting a 1.2% increase in retail sales in February, exceeding analysts' projections of 0.5%. Given this consumer confidence, it is unsurprising that S&P Global reports that most businesses experienced growth in March. This swathe of data led Governor Andrew Bailey to urge businesses to factor in deflation when determining their prices.

The Monetary Policy Committee will be hoping that consecutive rate increases since 2021 will kickstart deflation by the time it next meets in May. Time will only tell, but if these statistics are to be believed then the outlook is more positive than initially anticipated.

By

Joshua Troup