Bank may have bowed to pressure, economists say as markets expect rise to 6%
The Bank of England’s Monetary Policy Committee raised the interest rate from 4.5% to 5% on Thursday.
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Your support makes all the difference.The Bank of England might have bowed to pressure with a surprise half-percentage point hike in the interest base rate, economists said on Thursday.
It comes as markets started to expect that interest rates would rise to 6% by the end of this year as the Bank tries to rein in stubborn levels of inflation.
The Bank of England’s Monetary Policy Committee (MPC) raised the interest rate from 4.5% to 5% on Thursday. Experts had expected it to be raised to 4.75%.
The implication is that criticism of the Bank of England's credibility may have started to have an impact
Martin Beck, chief economic advisor to the EY Item Club, said that the Bank had not pushed back against the market expectation of a 6% interest rate in the minutes from its Thursday, perhaps in reaction to public criticism.
“On the other hand, it was noticeable that the MPC didn’t use June’s policy statement to push back against current market expectations that Bank Rate will continue to increase and peak at 6% early next year,” Mr Beck said.
“The implication is that criticism of the Bank of England’s credibility may have started to have an impact.”
But he also added that the Bank might have bought itself some breathing space thanks to Thursday’s decision.
“The fact that the MPC has now got ahead of market expectations may give it leeway to skip what had been a widely-expected further rate rise when the committee meets next in August,” he said.
“With headline inflation expected to come down noticeably over the next few months, there could be further rationale for a pause.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, added that the MPC’s choice of language showed that it might think that companies are starting to increase their profits, after months of squeezed margins.
“The MPC has demonstrated its determination to get a grip on domestically-generated inflation by hiking bank rate by 50bp and by choosing to omit any language designed to assure investors that the peak might be near,” he said.
He said the committee had added language to say it would monitor signs of persistent inflation “in the economy as a whole”.
He said this is “presumably to suggest that the committee is attentive to the risk of a period of profit-led inflation, though we see little evidence of this in the data so far.”
The Government is focusing on measures that help tackle increasing costs in the food sector and we will continue to engage with the food supply chain on potential measures to ease the pressure on consumers
In a letter to the Chancellor, Bank Governor Andrew Bailey said some firms were beginning to increase profit margins, adding to the rise in prices.
“The continued pass-through of costs to consumer prices may also be indicative of some rebuilding of profit margins by retailers,” he said.
“In the Bank’s decision maker panel, a higher share of manufacturers report an increase in margins over the past year than a decrease. But this is not the case for wholesale and retail businesses.”
In his reply, Jeremy Hunt said: “I note that the continued pass-through of costs to consumer prices may also be indicative of some rebuilding of profit margins.
“The Government is focusing on measures that help tackle increasing costs in the food sector and we will continue to engage with the food supply chain on potential measures to ease the pressure on consumers.”
Mr Tombs added: “Admittedly, the committee continues to talk about further rate hikes in a conditional sense – ‘if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’ – but if the committee had felt uncomfortable with markets pricing-in further increases in bank rate, it surely would have said so.”
He said the replacement of Silvana Tenreyro, who voted against today’s rise, on the committee in August suggests more rate increases are likely.