The Bank of England has announced that interest rates will remain higher for a longer period of time in an attempt to combat persistent inflation. This marks the first time the Bank has revealed this strategy, as it also announced another increase in rates from 5% to 5.25%. This is the 14th consecutive increase, bringing borrowing costs to a 15-year high.
While the Bank has lowered its forecasts for economic growth, it stated that the UK will continue to avoid a recession. However, it also indicated that interest rates will not automatically decrease once inflation returns to normal levels, signaling a commitment to keeping rates elevated.
Inflation, which measures the rate of price increases, slowed significantly in June to 7.9%. However, it remains nearly four times higher than the Bank of England’s target of 2%. The Bank’s Monetary Policy Committee stated that it will ensure that the bank rate remains sufficiently restrictive for a sustained period to bring inflation back to the target.
Governor Andrew Bailey emphasized the importance of reducing inflation, particularly for the most vulnerable individuals. He stated that the rate increase to 5.25% is necessary to ensure that inflation falls back to the 2% target.
The Bank also acknowledged that it may take slightly longer for inflation to slow down. While it maintained its previous forecast of a slowdown to around 4.9% by the end of the year, it now expects inflation to reach the 2% target between April and June of 2025. In May, the Bank had anticipated reaching this milestone by the first quarter of 2025.
Regarding economic growth, the Bank predicts sluggishness in the UK economy. Gross domestic product (GDP), which measures the value of goods and services produced by a country, is forecasted to grow by 0.5% in 2024 and just 0.25% in 2025. The Bank anticipates that the series of interest rate increases, which began in December 2021, will start to have a greater impact on demand next year. In May, the Bank had projected GDP growth of 0.75% for both 2024 and 2025.
The Bank of England stated that GDP growth is expected to remain below pre-pandemic rates for some time. These developments highlight the Bank’s efforts to address inflation while managing economic growth in the UK.
Why has the Bank of England decided to prolong the period of higher interest rates despite lowering their economic growth predictions?
Economy is still experiencing high levels of inflation, which has prompted them to prolong the period of higher interest rates. This decision comes as a surprise to many, as it is the first time the Bank of England has explicitly disclosed this strategy.
In addition to revealing their plan, the Bank also announced another hike in interest rates, increasing them from 5% to 5.25%. This latest increase is the 14th consecutive one, resulting in borrowing costs reaching their highest level in 15 years.
Despite lowering their economic growth predictions, the Bank emphasized that inflation remains a persistent issue in the UK. Consequently, they have decided to extend the duration of higher interest rates as a means to combat this ongoing problem.
This proactive move by the Bank of England to extend higher interest rates demonstrates their commitment to tackle the persistent issue of inflation. It is a necessary step to stabilize the economy and protect the purchasing power of consumers.