The Bank of England (BOE), the central bank for the United Kingdom, raised its main interest rate for the second time and will start reducing its stock of government and corporate bonds to tighten its monetary policy stance further as the economy is expected to bounce back quickly after a soft spell and inflation continues to rise in coming months.
BOE raised its bank rate by another 25 basis points to 0.50 percent and has now raised it by a total of 50 points after raising the rate by the same amount in December last year as it seeks to curb rising inflation from persistent cost and price pressures in a tight labor market.
BOE has now unwound most of the 60 basis points cut in the bank rate in March 2020 - at the height of the COVID-19 pandemic when the rate was slashed to a rock-bottom 0.10 percent from 0.75 percent -and forecast rates will continue to rise to around 1.50 percent by mid-2023.
BOE raised its bank rate by another 25 basis points to 0.50 percent and has now raised it by a total of 50 points after raising the rate by the same amount in December last year as it seeks to curb rising inflation from persistent cost and price pressures in a tight labor market.
BOE has now unwound most of the 60 basis points cut in the bank rate in March 2020 - at the height of the COVID-19 pandemic when the rate was slashed to a rock-bottom 0.10 percent from 0.75 percent -and forecast rates will continue to rise to around 1.50 percent by mid-2023.
The bank's monetary policy committee was split in its decision, with a majority of five members voting for the 25 basis point rate hike while four members voted to raise the rate by 50 points.
However, all nine members of the committee agreed it was time to reduce the bank's stock of UK government and corporate bonds by ceasing to reinvest maturing assets.
In addition to cutting rates in 2020, BOE also expanded it purchases of assets - known as quantitative easing - to ensure interest rates remained low and economic activity was stimulated, with the central bank's total stock of assets purchased eventually reaching 895 billion pounds.
But with the UK and global economies recovering rapidly, central banks and governments worldwide are now unwinding the massive amount of stimulus injected in 2020 and 2021 to avoid economies from overeating and high inflation from becoming persistent.
"The MPC (monetary policy committee) judges that, if the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months," BOE said, adding the extent of tightening will depend on the prospects for inflation.
Initially, BOE will begin the process of reducing its stock of 20 billion pounds of sterling denominated non-financial investment-grade corporate bonds by first stopping reinvesting maturing bonds and then begin selling them all by the end of 2023.
The central bank said it would first consider selling its 875 billion pound stock of UK government bonds once the bank rate was raised to at least 1.0 percent.
As many other counties, economic activity in the UK slowed in December and January in response to the Omicron variant, but BOE said the economic impact was likely to be limited and of short duration, with economic output returning to its pre-pandemic level again by the end of the first quarter.
In its latest monetary policy report, BOE lowered its forecast for economic growth in the first quarter of 2022 to 7.8 percent from an earlier 9.5 percent and cut the forecast for growth in the first quarter of 2023 to 1.8 percent from 2.1 percent.
In the third quarter of last year, UK gross domestic product grew 6.8 percent year-on-year, down from 24.2 percent in the second quarter.
"Beyond the near term, UK GDP growth is expected to slow to subdued rate," BOE said, pointing to the impact of higher global energy and goods prices on income and spending.
Growth in the first quarter of 2024 is seen at 1.1 percent and 0.9 percent in first quarter of 2025.
Inflation, however, is more than twice the BOE's target of 2.0 percent and hit 5.4 percent in December, almost 1 percentage point higher the bank forecast in November.
BOE expects inflation to rise further in coming months to close to 6.0 percent in February and March before peaking around 7.25 percent in April, around 2 percentage points higher than earlier forecast, due to the higher costs of global energy and goods.
BOE raised its forecasts for headline inflation of 5.2 percent in the first quarter of 2023, up from an earlier 3.3 percent, but expects wage growth and global bottlenecks to ease over time, with inflation declining to 2.1 percent in the first quarter of 2024 and then to 1.6 percent in 2025 first quarter.
Based on forward market rates, BOE forecast the bank rate rising to 1.3 percent by the first quarter of 2023 - up from its previous forecast of 1.0 percent - then 1.4 percent in the first quarter of 2024 before easing to 1.3 percent in the first quarter of 2025.
