Bank Base Rate increased as predicted to 3%

In an outbreak of predictability, when we all know the Base Rate is heading towards 4% to keep up with the Dollar and the Fed, The Monetary Policy Committee (MPC) voted 7-2 for an increase of 0.75% to a total 3%. The two dissenting Doves wanted increases of either 0.5% or 0.25%.

The MPC is trying to balance the deflationary pressure on CPI of the energy price cap predicted to last beyond the initial 6-month review period and the inflationary pressure this causes by boosting the relative buying power of domestic demand.

This decision has not incorporated any calculations to factor in what might be announced in the Budget statement on the 17th of November.

CPI inflation was significantly above the medium-term 2% target for September at 10.1% and the Bank is expecting this to increase further before the end of the year to 11%. Inflation will then fall back during 2023 as the energy price rises start to wind out significantly and in the medium term (2 years) the Bank is expecting inflation to fall sharply below the target 2%.

The published summary of the MPC decision said:

“In projections conditioned on the alternative assumption of constant interest rates at 3%, activity is stronger than in the MPC’s forecast conditioned on market rates, although GDP is still expected to be falling at the end of 2023. CPI inflation is projected to be a little above the target at the end of the second year. However, it falls more than a percentage point below the target at the end of the third year.

“The risks around both sets of inflation projections are judged to be skewed to the upside in the medium term, however, in part reflecting the possibility of more persistence in wage and price setting.

“The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has been subject to a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.

“The labour market remains tight and there have been continuing signs of firmer inflation in domestic prices and wages that could indicate greater persistence. Currently announced fiscal policy, including the MPC’s working assumption about continued fiscal support for household energy prices, will also support demand, relative to the Committee’s projections in August. The Committee will take account of any additional information in the Government’s Autumn Statement at its December meeting and in its next forecast in February.”

Share This Article