The Bank of England has raised interest rates by 0.25 percentage points to 5.25%

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The Bank of England has raised interest rates by 0.25 percentage points to 5.25 per cent and warned that borrowing costs are likely to remain elevated despite slowing inflation.
The central bank’s Monetary Policy Committee voted by six to three on Thursday to take interest rates to a 15-year high, with two members preferring a larger 0.5 percentage point move and one voting to pause.
Inflation fell to 7.9 per cent in June, a bigger decline than expected, and most economists had forecast a quarter-point increase after the central bank had raised rates by half a point at its last meeting.
But the MPC cautioned that “it was too early to conclude that the economy was at or very close to a significant turning point”.
BoE governor Andrew Bailey emphasised on Wednesday that interest rates would need to stay at high levels for a sustained period of time, saying that “in order to get inflation back to target, we are going to have to keep this stance of policy”.
But he also suggested that rates might be close to their peak, saying repeatedly there was “more than one path” that could bring inflation sustainably back to its target.
Prices in the UK are still rising at a faster pace than in other advanced economies such as the US, Japan and the eurozone, where hopes are rising that interest rates are close to a peak.
Sterling slipped and UK government bond yields fell after the BoE move. The pound extended early losses to touch a five-week low of $1.2623 shortly after the BoE’s decision. It later pared its losses to trade at $1.2651.
Two-year UK government bond yields, which are highly sensitive to short-term interest rates, fell to 4.92 per cent from 4.94 per cent before the announcement. 
The bank’s updated forecasts suggest that even if interest rates rise further, in line with recent market expectations, it will still take until mid-2025 for inflation to fall to the BoE’s 2 per cent target.
The MPC said this was because it now saw evidence of a feedback loop developing between wages and prices, meaning that “some of the risks of greater persistence . . . had crystallised”.
Reiterating its previous guidance, the bank said further tightening of monetary policy would be needed if it saw evidence of more persistent inflationary pressures.
But in new wording, it also said it “would ensure that the bank rate was sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target”.
It said that while the economy had shown “surprising resilience”, higher borrowing costs were now starting to take their toll on activity, with more definite signs emerging of the job market cooling and unemployment starting to rise.
The MPC’s new forecasts — based on higher interest rates and a stronger exchange rate than its May projections — show a weaker path for economic activity, with consumer spending slowing, business investment swinging from growth to contraction in 2024 and housing investment falling sharply.
“The economy has been much more resilient and that is good news,” Bailey said, adding: “We were sitting here last November saying there’s going to be a long, shallow recession . . . that has not transpired.
The BoE said it expected gross domestic product growth to remain steady at a quarterly pace of 0.2 per cent in the near term, but to weaken as the effects of higher interest rates add up, though avoiding a recession.
It also expects inflation to continue falling in the near term, averaging 6.9 per cent in the third quarter of 2023 and 4.9 per cent over the fourth quarter.
The BoE’s forecast that inflation will fall below 5 per cent in the fourth quarter is good news for UK prime minister Rishi Sunak, who had promised to “halve inflation” to 5.4 per cent by the end of the year.
Jeremy Hunt, chancellor, said: “If we stick to the plan, the bank forecasts inflation will be below 3 per cent 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,” he added.
Sunak and Hunt are eager to avoid a recession, particularly next year, when a general election year is due.

Shadow chancellor Rachel Reeves said: “This latest rise in interest rates will be incredibly worrying for households across Britain already struggling to make ends meet.” She added that “the Tory mortgage bombshell is hitting families hard”.

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