As the rate of inflation fell more than expected in June, the Bank of England has greenlighted another interest rate increase.
Trapped between high inflation and an economy on the brink of recession, the Bank of England (BoE) has once again increased the UK interest rate, taking the figure to 5.25%. The decision takes the UK's Bank Rate to its highest point since 2008.
The Bank's Monetary Policy Committee (MPC) voted on the 0.25% increase with a vote split. Two members preferred to increase the bank rate by 0.5% to 5.5% to "lean more actively" against inflation persistence.
Meanwhile, one member voted to maintain the bank rate at 5%, arguing that there was no longer a strong case for tightening monetary policy further.
In its report, the MPC argued that "the labour market remains tight but there are some indications that it is loosening", as one of the main drivers behind its decision. It forecast a further drop in inflation to 5% by the end of the year. The MPC has also stuck to the second quarter of 2025 as its target to reach 2% inflation.
The increase mirrors the US Federal Reserve's recent decision to also increase borrowing costs by a quarter percentage point, taking their current figure from 5.25% to 5.5%. The Eurozone was also in lockstep with its contemporaries, increasing its interest rate from 3.25% to 3.5%.
The announcement follows some relative relief to the UK economy, with annual inflation dropping from 8.7% in May to 7.9% in June. While inflation is still a far cry from the BoE's 2% target, the recent easing of inflation pressure will likely be seen as justification for the BoE's aggressive increases in the bank rate over the last year.
Commenting in the wake of the announcement, Chancellor of the Exchequer Jeremy Hunt remained positive that inflation can be curtailed, but called for caution as the UK continues to struggle with higher mortgage bills.
"If we stick to the plan, the Bank forecasts inflation will be below 3% in a year's time without the economy falling into a recession. But that doesn't mean it's easy for families facing higher mortgage bills so we will continue to do what we can to help households," Hunt said.
However, while the Government was optimistic, the MPC stated that it will "continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole" with a focus on the tightness of the labour market.
"If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required," the MPC added.
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