Bank raises interest rates again and predicts inflation will peak at 11% this autumn

The Bank of England now sees worrying signs that inflation is starting to build domestically, Economics Editor Joel Hills reports

The Bank of England is raising the cost of borrowing for the fifth time in seven months in an attempt to tame soaring inflation.

The Bank’s job is to keep prices stable but prices are very unstable.

Inflation is rising with a force and a persistence that continues to defy its forecasts.

In the latest set of minutes, the Monetary Policy Committee (MPC) - which sets interest rates - judges that the headline annual rate of inflation will now peak at “slightly above 11% in October”.  Only last month it had 10% pencilled in.

The Bank of England said it can't do anything to stop inflation hitting 11%, Joel Hills reports

The Bank blames an “additional large increase” in OFGEM’s energy price cap, scheduled for this winter, and signs that prices are rising “across the major components of consumer prices”. Translation: high inflation in the UK is more-or-less everywhere.The MPC has raised Bank Rate by 0.25% to 1.25%. The vote was split. Three of the committee’s nine members wanted to be more muscular, hiking rates by 0.5%.Higher interest rates will not bring down the market price of oil or make the supermarket shop cheaper. Indeed, for many households with mortgages, it will further tighten the squeeze on their living standards.The Bank is trying to further slow an almost stagnate economy in an attempt to get inflation back on a leash.

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The UK is suffering from runway prices because it has been hit by a series of external shocks - the Covid-19 pandemic and the war in Ukraine.But, as the Governor of the Bank of England points out in his letter to the chancellor: "Not all of the excess inflation can be attributed to global events."The Bank’s worry is that there are signs that inflation is starting to be generated domestically in the UK - that companies are raising their prices and workers are asking for (and getting) compensatory pay rises.

There are a record number of vacancies in the economy and unemployment is at a near record low. The Bank believes that tightness of the labour market creates the perfect conditions for inflation to start to feeding itself.The chancellor’s £15 billion Cost of Living Support package is also judged to be inflationary but only mildly so.

The Bank estimates the financial support for households will increase inflation by 0.1% and will boost growth by 0.3%.

The recovery from the pandemic ran out of steam in February. As it stands, the Bank now expects the economy to contract between April and June.

Where do things go from here? It’s an impossible question to answer. Much depends on events in Ukraine.Once upon a time the Bank of England made public promises that interest rates rises, when they occurred, would be “gradual” and “limited”. That commitment is long gone.The level of uncertainty is such that all forward guidance appears to have abandoned.The Bank will do what it takes to “return inflation to the 2% target” and will “act forcefully” if necessary.For what it’s worth, investors believe Bank Rate will reach 2.9% by the end of this year, peaking at 3.3% in 2023.Homeowners and estates agents will be hoping the market is wrong.