The Bank of England has shocked economists and investors by raising interest rates half a percentage point to 5% – the highest level since 2008.
Economists had expected the Monetary Policy Committee to raise interest rates by only a quarter percentage point, but the MPC voted 7-2 for the surprise increase, explaining that it was aiming to bring higher-than-expected inflation under control and indicated concern about high wage increases and company profit margins.
It comes after the UK’s official inflation rate failed to fall as expected in May, staying at 8.7% – well above the bank’s 2% target.
In the minutes alongside the decision, the bank said higher inflation, especially services inflation, meant it had to act faster to bring prices under control.
Governor Andrew Bailey later revealed concerns about corporate profiteering and wages.
He has previously suggested that food producers – rather than supermarkets – may be overcharging and said today that wage rises, running at 7.2%, were also feeding inflation.
“We cannot continue to have the current level of wage increases.
“We can’t have companies seeking to rebuild profit margins which means prices continue to go up at their current rates…
“The current levels, I’ll be honest, are unsustainable”, he said.
With other major central banks around the world now slowing the pace at which they’re increasing interest rates, the rate move will be seen as a further sign that Britain is becoming something of an outlier.
The UK has higher inflation than any other country in the G7 and is expected to see its interest rates peak higher than other major economies.
Markets expect the bank to carry on raising borrowing costs in the coming months, with interest rates slated to peak at around 6% at the turn of the next year.
In its minutes, the bank reiterated that “if there were to be evidence of more persistent pressures [in inflation], then further tightening in monetary policy would be required”.
Two of the MPC members, Swati Dhingra and Silvana Tenreyro, voted to leave interest rates on hold at 4.5%, warning that inflation was likely to fall rapidly in the coming months and that the full impact of higher bank interest rates had yet to be felt by the wider economy.
However, the rest of the committee voted for the half percentage point increase – an increase which none of the economists recently surveyed by financial news outlets had expected.
“There had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand,” the minutes said.
Some will ask, however, whether this faster-than-expected increase will raise the chances of the UK tipping into recession in the coming months.
The bank has yet to update its own forecasts to reflect this – that will happen next month.