In the UK, output growth has remained firm and appears to be evolving in line with the Committee’s most recent projections. Credit and broad money continue to grow rapidly. The pace of expansion of the world economy remains robust. CPI inflation fell back to 2.5% in May. Lower gas and electricity prices mean that CPI inflation is likely to continue to fall back to around the 2% target in the course of this year. Although pay pressures remain muted, the margin of spare capacity in businesses appears limited and most indicators of pricing pressure remain elevated. The Committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside. Against that background, it further judged that an increase in Bank Rate of 0.25 percentage points to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term. Barry Naisbitt, Chief Economist at Abbey said: “Today’s decision to raise base rates again by 0.25% to 5.75% was widely expected.”
The split vote of the Monetary Policy Committee last month clearly influenced the views of commentators in financial markets to expect a rate rise a little earlier than they had previously factored in. Concerns about the prospects for sustainable restoring inflation to its 2% target level into the medium-term, the robust pace of economic activity and the relatively rapid pace of monetary growth, are all likely to have played a part in today’s decision. “The key issues going forward will be how strong the economic data is over the coming months and how the MPC will view them in the light of its expectations for inflation into the medium term.”
The June inflation figure will be published soon and economists are expecting a further reduction from May’s 2.5%, which the Bank of England would welcome after the inflation figures earlier this year. Stephen Leonard, Director of Mortgages at Alliance & Leicester, said: “Today’s rate rise in many ways was a done deal given continued concerns echoing from within the MPC over inflationary pressures.” (easier.com)
