Bank of England: Are we nearly there yet?

11 May 2023

How high can they go? Despite much economic uncertainty, the Bank of England (BoE) has raised interest rates for the 12th consecutive time.

The latest hike of 0.25% takes the base rate to 4.5%. It’s a level not seen since 2008, a year that lives long in the memory for other, unconnected reasons.

For homeowners and borrowers, the rise is further unwelcome news as the cost-of-living squeeze strains family, and business, finances. Unfortunately for them, the BoE hasn’t yet been able to tame UK inflation, which remains stubbornly high at 10.1%1.

As the BoE’s website stated after the rate announcement: “We know that…many people will face higher borrowing costs. Around one in three households in the UK have a mortgage. But high inflation that lasts for a long time makes things worse for everyone.2

Déjà vu

In many ways, this latest decision by the BoE’s Monetary Policy Committee (MPC) has a Groundhog Day feel to it. Once again, the rate rise follows hikes by the US Federal Reserve (Fed) and the European Central Bank (ECB).

There also remains a difference of opinion among voting members. This month, seven members voted in favour of the rise, with two contrarians in Swati Dhingra and Silvana Tenreyro. As was the case in the last four MPC meetings, they each voted to keep rates on hold.

As we’ve consistently mentioned in previous articles, the inflationary environment leaves the BoE, and other major central banks, in an unenviable position. The longer the hikes continue, the narrower their future options become.

The challenge – or rather, the headache – for policymakers remains thus: How to tame inflation without strangling the economy and causing collateral damage.

As we saw with March’s collapse of Silicon Valley Bank (SVB) in the US, aggressive monetary policy can take a toll (albeit it wasn’t the only catalyst of SVB’s demise). The irony also being that it wasn’t long ago when observers were accusing the Fed of being too timid in the face of so-called ‘transitory’ inflation.

A glimmer of hope?

Despite the latest rate rise, there was at least an acknowledgement that inflation won’t get any worse, which should bring a halt to the hiking cycle: “We expect inflation to fall quickly this year. We expect inflation to then meet our 2% target by late 2024. That doesn’t mean that prices will fall, but they will stop increasing so quickly.3 ”

As BoE Governor Andrew Bailey stressed at the post-MPC press conference, the UK economic backdrop has improved since recession fears recently emerged. He was quoted as saying that there will be “modest but positive growth4”, while consumer confidence was also said to have ticked upwards.

The BoE’s core expectation is that inflation will soon take a sharp turn downwards, despite food inflation remaining persistently high: “CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison. In addition, the extension in the Spring Budget of the Energy Price Guarantee and declines in wholesale energy prices will both lower the contribution from household energy bills to CPI inflation.5

Next steps

Interest rate rises were never going to be a quick fix, but few would have envisaged inflation staying as high as it has, for so long.

Twelve consecutive BoE rate increases, coupled with easing energy price pressures, should start to take effect soon, allowing the MPC to take a softer stance.

While uncertainty continues to plague policymakers and borrowers, the hope is that the inflation engine will run out of steam sooner rather than later. In the meantime, the BoE’s core 2% target looks some way off yet.

Related articles


This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.

This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.

This communication: 

(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;

(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation; 

(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and

(iv) has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.