The Bank of England has raised interest rates for the third time in a row, and warns that Russia’s invasion of Ukraine is likely to see inflation soar as high as 8%.
The Bank’s Monetary Policy Committee hiked rates from 0.5% to 0.75%, a return to pre-pandemic levels, after voting 8-1 in favor of the increase.
UK inflation was already at a 30-year high prior to the Russian invasion, and at 5.5% is well above the Bank’s 2% target. Events in eastern Europe have only served to exacerbate matters, with the bank explaining the the Ukraine invasion “has led to further large increases in energy and other commodity prices including food prices.”
“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly,” it added.
When the Monetary Policy Committee met last month they implemented back-to-back rate increases for the first time since 2004. At the time a third increase in a row seemed incredibly unlikely, but Vladimir Putin’s actions have turned everything on its head.
The Bank said when approving the February increase that future monetary policy would be dependent on inflation rates, at the time projected to peak at 7.25% in April. In light of unfolding events, the Bank has revised that projection to 8% inflation in April with further increases on the horizon, warning that the rate could move into double figures this year if increasing wholesale energy prices push up the energy price cap.
Sterling fell against the dollar following the decision, with analysts warning it could fall further due to the UK being more susceptible to events in Ukraine. The Bank of England’s tone was much more cautious than recent announcements from the US Federal Reserve, highlighting that the UK has more at stake as an energy importer.
The committee said that further interest rate hikes “might be appropriate in coming months, but there were risks on both sides of that judgement depending on how medium-term prospects evolved.”. Overall though the tone seemed to suggest a less aggressive approach moving forward than many had predicted, and analysts expect the run of rate hikes to end following one further increase to 1%.