UK inflation is expected to fall slower than previously thought as food prices remain stubbornly high, the Bank of England has said, as it raised interest rates for the 12th time in a row.
Seven members of the Bank’s Monetary Policy Committee (MPC) voted to increase the base interest rate to 4.5% from 4.25%.
Food prices have stayed higher for longer than expected, the Bank said, partly due to Russia’s war in Ukraine and poor harvests in some European countries, ramping up the cost of living for households across the UK.
It means Consumer Prices Index (CPI) inflation is expected to decline less rapidly than the Bank predicted in its last report in February.
“There remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target,” it added.
Inflation is expected to decline to 5.1% in the fourth quarter of the year, meaning the Government would narrowly hit its target to halve inflation by the end of the year.
The Bank had previously thought CPI inflation could fall as low as 1% by the middle of 2024 but it is now predicted to reach around 3.4%.
The hike to the interest rate – which is at the highest level since 2008 – will pile more pressure on borrowers and help the Bank to bring inflation down to the 2% target.
But the impact of higher rates has yet to be widely felt for households across the country, partly because many borrowers are tied to fixed-rate mortgages that have not renewed yet.
Meanwhile, economists at the Bank released a record upgrade to their economic growth expectations.
They now expect that gross domestic product (GDP) will not fall during a single quarter this year, meaning the economy is not set to decline and the UK could avoid a recession.
In February, the committee believed the economy could fall into a shallow recession starting from the first three months of the year.
Now it expects GDP to rise by 0.25% this year before a 0.75% increase next year and the year after. It had previously forecast a 0.5% fall this year, followed by a drop of 0.25% next year and a 0.25% rise in 2025.
The increase of 2.25 percentage points over the three-year forecast period marked the biggest upgrade since the MPC was formed in 1997.
“The improved outlook reflects stronger global growth, lower energy prices, the fiscal support in the Spring Budget, and the possibility that a tight labour market leads to lower precautionary saving by households,” the report explained.
Nevertheless, higher food and energy prices will continue to disproportionally hit families on lower incomes as the items typically make up a larger share of overall spending, the Bank said.
Just two of the Bank’s nine-member MPC voted to keep interest rates the same at 4.25%.