The Bank of England’s Rate Hike Shouldn’t Have Been a Shock
Getting inflation back on target will likely require more tightening.
Not quite according to plan.
Photographer: Hollie Adams/Bloomberg
The Bank of England surprised financial markets last week by raising its policy rate half a percentage point instead of the expected quarter. The bigger surprise was that so many investors and analysts were surprised. With inflation stuck for a second month at 8.7%, much higher than in Europe or the US, the central bank’s new policy rate of 5% is still substantially negative in real terms. If the UK is to get inflation back down to its 2% target, this latest move is unlikely to be enough.
To its credit, the bank gave a thorough account in explaining its decision. It said headline inflation is bound to fall somewhat this year as earlier spikes in energy prices drop out of the numbers. But measures of underlying inflation have moved the wrong way. So-called core inflation rose from 6.8% in April to 7.1% in May, and inflation in the price of services rose from 6.9% to 7.4%. Although various temporary factors are doubtless involved, both these outcomes were worse than the bank had predicted.