DWS: High inflation rates leave the Bank of England no choice

DWS: High inflation rates leave the Bank of England no choice

June 22, 2023

Monetary policy UK
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Around the world, central banks are dealing with stubborn core inflation rates. This is especially true in the UK, where the core rate jumped above the 7% mark in May. The Bank of England reacted to this today with a surprise interest rate hike of 50 basis points.

The bank rate now stands at 5.0%. Seven members of the Monetary Policy Committee voted in favour, two preferred to maintain the key rate at 4.50%. This shows how serious the inflation problem is due to a tight labour market and strong wage growth.

On the other hand, the restrictive monetary policy has not been fully transmitted into the real economy, yet, especially due to the higher share of fixed-rate mortgages. Therefore, the full impact of the increase in the bank rate to date will not be felt for some time, as the Bank of England pointed out.

Despite the large interest rate hike, the risks remain high that inflation will be too high for too long. The Bank of England is therefore rightly sticking to its "tightening bias". It could become even more restrictive if the inflation dynamic turns out to be more persistent than expected. Against this background, further rate hikes cannot be ruled out.

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