The Bank of England’s Monetary Policy Committee (MPC) which sets monetary policy to meet the 2% inflation target, announced on 11 May 2023 its decision to raise UK interest rates by 25 basis points to 4 50%. UK interest rates are also now at their highest since October 2008. The MPC voted by a majority of 7-2 to increase interest rates to 4.50% with two members (Swati Dhingra and Silvana Tenreyro) voted against the proposition, preferring to maintain Bank Rate at 4.25%. The next announcement on interest rates will be on 22 June 2023.

Responding to today’s interest rate decision by the Bank of England’s Monetary Policy Committee, Suren Thiru, Economies Director for ICAEW, said: “Another rate rise will come as a nasty blow to those people and companies already battling escalating borrowing costs and a multitude of other severe cost pressures.

“The Monetary Policy Committee needs to be more forward looking in setting interest rates rather than being overly focused on current inflation given the long-time lag between rate rises and its impact on the broader economy. With most of the interest rate rises yet to pass through to households and businesses, the Bank of England risks overdoing the rate hikes, adding to squeeze on our growth prospects and aggravating the cost-of-living crisis.

“Given that the Bank of England is still expecting inflation to fall back, the case for rate setters to pivot towards cutting interest rates is likely to strengthen.”

The Bank of England also released its Quarterly Monetary Policy Report, which provides an update on the bank’s outlook for the UK economy. On its latest projections, the central bank no longer expects the UK to enter a technical recession. UK GDP is expected to be flat over the first half of this year, although underlying output, excluding the estimated impact of strikes and an extra bank holiday, is projected to grow modestly. The upgraded growth forecast for the UK reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households. However, UK GDP growth is expected to remain very weak for the next three years, with the outlook for business investment remaining challenging.

Inflation is now expected to fall more slowly than previously expected, dropping to 5% by the end of this year, above the 4% previously predicted. 

On the Bank of England’s latest Monetary Policy Report, Thiru added: “The Bank of England’s latest forecasts paint a much more positive picture of the UK’s short-term growth prospects than their previous report. However, its medium-term projections suggest that our economic performance is likely to remain sluggish for the foreseeable future.

“The weak outlook for business investment is particularly concerning as it limits our ability to raise productivity, deliver a sustainably high wage economy, and if not addressed will continue to undermine the UK’s growth potential.”

Further information: 

• Minutes from the May MPC meeting
• Bank of England Monetary Policy Report: May 2023