BOE Matches Fed’s Rate Rise, Signals There May Be More

The Bank of England raised its key interest rate for the 12th consecutive time and signaled more increases are possible as it released less gloomy forecasts for the U.K. economy.

The central bank raised the rate to 4.5% from 4.25% on Thursday, having begun to tighten its monetary policy in December 2021 when borrowing costs stood at 0.1%. The key rate is now at its highest level since October 2008, while the cumulative move over 12 steps is the largest since the late 1980s.

The BOE’s latest rate rise was the same in size as those announced by the Federal Reserve and the European Central Bank last week. However, the three central banks have sent different signals about their likely future paths.

Fed officials signaled they might be done raising interest rates, while the ECB made clear that it isn’t ready to pause its campaign against high inflation.

On Thursday, the BOE signaled it might raise interest rates again if there are signs that inflation is likely to stay high for longer than it now expects.

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the BOE said.

U.K. government-bond yields moved higher after the announcement and the pound pared earlier losses as investors anticipated one or two more quarter-point rate increases.

However, BOE Gov. Andrew Bailey told reporters that the statement on future rate moves was “conditional,” and that rate setters are “not giving a directional steer.”

The U.K.’s inflation rate in March was the highest among the Group of Seven wealthy democracies, with consumer prices rising 10.1% from a year earlier, more than twice as quickly as in the U.S.

The U.K.’s inflation gap with the rest of the G-7 likely narrowed in Aprilin comparison with a year earlier, when energy prices jumped more than 50%. Economists expect energy prices to fall below their current level from July, contributing to a sharp fall in headline inflation.

The BOE first indicated that it may be nearing an end to its series of rate rises in February but has continued to tighten policy, an indication of how difficult it is for policy makers to be sure they have inflation under control. Earlier this month, the Reserve Bank of Australia surprised financial markets by raising interest rates a month after pausing to assess the impact of earlier tightening.

For the BOE, recent measures of inflation have been higher than expected, and the jobs market has been tighter. The central bank had expected the U.K. economy to be in recession at the end of 2022 and in early 2023, but policy makers said Thursday that they had underestimated its resilience in the face of higher food and energy prices—and their own rate rises.

In fact, the U.K. economy grew in the final quarter of last year, and the BOE said figures to be released Friday would probably show it avoided a contraction in the first quarter of this year, albeit narrowly.

Over 2023 as a whole, the BOE now expects the U.K. economy to grow by 0.25%, having previously forecast it would shrink by 0.5%, and it no longer expects to see a fall in output in any quarter.

The BOE now expects the economy to grow 0.75% next year, having previously forecast a contraction of 0.25%. By the second quarter of 2026, the BOE expects economic output to be around 2.25% higher than it did in February on lower energy prices, a smaller rise in unemployment and government stimulus measures. That is the largest increase in its growth forecast since 1997, when the current way of setting interest rates was introduced.

“This is not a strong forecast,” said Mr. Bailey. “But the growth outlook is less weak.”

The central bank said inflation would be higher over the coming year than it had previously forecast, as a surge in food prices would likely take longer to ease than it had expected. But it projected that the inflation rate would fall below 2% from the first quarter of 2025 if it were to raise its key rate to a high of 4.75% over the coming months, as investors had expected it to in the run-up to its policy meeting.

That is an indication that in the BOE’s view, another rise in its key rate may not be necessary. Policy makers noted that much of the impact of their previous rate rises has yet to be felt, with many households set to face sharply higher interest costs as their fixed-rate mortgage deals expire this year and next.

Two of the BOE’s nine rate setters continued to resist further rate rises, voting to leave borrowing costs unchanged for the fourth straight meeting.