The Bank of England raised U.K. interest rates by 25 basis points to 5.25% — its 14th consecutive hike — as it continues to battle inflation.
The bank's monetary policy committee, which set its policy to meet a 2% inflation target, decided 6-3 in its meeting Wednesday to raise rates by 25 basis points. Two members of the committee looked to raise rates by 50 basis points, and one member wanted to maintain the rate at 5%, the bank said in an update Thursday.
The bank said the U.K. labor market "remains tight but there are some indications that it is loosening."
Annual private-sector regular pay growth increased to 7.7% in the three months to May, which the bank said was "materially above expectations" when it released its May report. Earnings growth is, however, expected to fall in the coming quarters to around 6% by the end of the year.
CPI inflation fell to 7.9% in June from 8.7% in May, which was lower than expected when the committee previously met in June. While remaining "well above the 2% target," CPI inflation is expected to fall significantly further, to around 5% by the end of the year, the bank said.
The MPC expects CPI inflation to return to the 2% target by the second quarter of 2025. "It then falls below the target in the medium term, as an increasing degree of economic slack reduces domestic inflationary pressures, alongside declining external cost pressures," the update said.
The bank is coming under increasing pressure to end its rate-increasing approach, said Steve Hodder, investment partner at consultant Lane Clark & Peacock, in an emailed comment. "To some, it has started to act like 'a person with only a hammer, where every problem looks like a nail,'" Mr. Hodder said.
"But whilst inflation remains stubbornly high, this isn't an argument against the policy. We don't know where inflation would be if the bank hadn't acted. If anything, stubborn inflation suggests harder action was needed," he said.
The key question for the bank is whether it "can successfully balance the use of its hammer — there is a real risk of over-tightening causing a deep recession, in particular given the lagged effects of increased rates," Mr. Hodder said.
Vivek Paul, U.K. chief investment strategist at the BlackRock Investment Institute, highlighted in an emailed comment that the bank had also signaled that more hikes were to come.
"The bank continues to grapple with the starkest trade-off between inflation and growth in a generation. After a run of higher-than-expected prints, inflation undershot expectations in the July print — but remains multiples of the 2% target. If the Bank of England wants to get inflation right down, economic damage is highly likely — expect more of this to come," Mr. Paul said, adding that the BOE has delivered more than 500 basis points in cumulative tightening so far. As such, he said "it is hard to see the U.K. avoiding a period of weak economic growth."
The bank's MPC next meets Sept. 21.
