PwC comments on the Bank of England MPC meeting and rate increase

Barret Kupelian, senior economist at PwC UK, comments:

"The Bank of England’s Monetary Policy Committee (MPC) increased its base rate by 25 basis points to 0.75%, bringing it back to pre-pandemic levels, signalling that the pandemic is in its rear view mirror. This is the Bank’s third consecutive rate rise—the last time this happened was when the Bank of England first became independent in the summer of 1997 (see chart below).

"Inflation projections continue to rise. The Bank now expects the CPI inflation rate to increase to around 8% in the second quarter of this year, up from its original projection of 7¼% last month, further exacerbating the squeeze on households and businesses. Most of this is driven by higher commodity price pressures due to the war in Ukraine. For businesses, the continued change in projections in a short-period of time shows how difficult it is to plan with a reasonable degree of certainty.

"Wage growth remains above pre-pandemic levels. Focusing on domestic demand, the Bank estimates that private sector pay continues to grow at an underlying rate of around 4 to 4½%, which is around a percentage point above pre-pandemic levels. Even though the Bank’s network of Agents suggest that this is likely to persist, businesses could end up re-considering decisions on staff pay if cost pressures continue and businesses and consumers start to cut back on their spending in the economy.

"What does the future hold? The MPC states “further modest tightening” may be appropriate but also highlights the broad spectrum of uncertainty which could directly and indirectly affect the outlook for inflation. Aside from the price pressures in commodity markets, such as energy, food, and metals, we are also monitoring the lockdowns in China as these could amplify price pressures across supply chains."