On Thursday the BoE raised interest rates by 0.25% to 1.25%. This represented the fifth consecutive rate hike since December 2021. The statement released by the Monetary Policy Committee (MPC) following the meeting showed the BoE maintained a hawkish tone, leaving the door ajar for more and larger rate increases in the coming months.
The BoE decided not to follow the steps from the US Federal Reserve and the Swiss National Bank which earlier in the week had announced larger-than-expected interest rate increases. Instead, it chose to stick to its gradual approach to fight inflation, which is expected to peak at 11% YoY in October before slowing by the end of Q4-22.1
The explanation for the less aggressive action from the BoE relies on their expectations of a weak performance of the UK economy in the coming months. In Q1-22 GDP increased by 0.8% QoQ, below BoE’s expectations from the May Monetary Policy report. Despite the fall in business investment of 0.5% QoQ in Q1, household consumption increased by 0.4% and government expenditure grew by 1.5%.
However, figures for the first month of Q2-22 show a larger-than-expected deceleration of the UK economy, as April GDP fell by 0.3%, driven by a decline in government services output.2 As a result, the BoE now expects UK GDP to decline in Q2 by 0.3% QoQ. This represents a downgrade from the 0.1% growth that was projected in May for the quarter. The Composite PMI index declined for the third consecutive month to 53.1 in May although it remains above the 50 threshold that separates growth from contraction, see Chart 1.