A timid BoE will mean higher for longer UK inflation
SchrodersJul 14, 2022
On Thursday, the Bank of England (BoE) raised its key interest rate by 50 basis points to 2.25% — the highest since 2008.
This comes as the BoE forecast that the economy will shrink by 0.1% in the third quarter, which would be the second quarter in a row that the economy has contracted, meeting an informal definition of a recession.
Despite facing an inflation crisis that outpaces other major economic players, the BoE — which decided to raise rates only by 50 basis points rather than 75 — is lagging far behind and taking an overly cautious approach in its monetary tightening. This will only result in higher inflation for longer and an underperforming sterling.
Amid the looming threat of a recession, the BoE's modest approach is the right one. The bank is in the tricky position of having to balance the need to control inflation against a desire to protect an increasingly fragile economy. Following a policy of gradual increase walks down the middle; the BoE can reassess at its next meeting.