The Bank of England’s monetary policy committee is warning that inflation – which is effectively determining base rate and interest rates – will not hit its two per cent target until approaching the middle of 2025.

A statement from the Bank says: “Consumer Price Index inflation remains well above the 2.0 per cent target.        

“It is expected to fall significantly further, to around 5.0 per cent by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation. Services price inflation, however, is projected to remain elevated at close to its current rate in the near term.

“In the MPC’s August most likely, or modal, projection conditioned on market interest rates, CPI inflation returns to the 2.0 per cent target by 2025 Q2. It then falls below the target in the medium term, as an increasing degree of economic slack reduces domestic inflationary pressures, alongside declining external cost pressures.”

The MPC goes on to say that “it is clear that the inflation target applies at all times” – a clear indicator that it will not be rushed into reducing base rate. 

The Bank has also given a detailed insight into the thinking behind last week’s 0.25 per cent base rate rise, to 5.25 per cent.

It says: “Six members [of the monetary policy committee] judged that a 0.25 percentage point increase in Bank Rate, to 5.25 per cent, was warranted at this meeting. Recent data outturns had been mixed. However, some key indicators, notably wage growth, had surprised significantly on the upside. This could indicate that the medium-term equilibrium rate of unemployment had risen, and that some of the risks of greater persistence in broader domestic inflationary pressures had crystallised. Set against that, the unemployment rate had increased a little and the vacancies to unemployment ratio had decreased further since the previous MPC meeting.”

Meanwhile two MPC members judged that a 0.5 percentage point increase in Bank Rate was warranted. The Bank reports: “For these members, it was important to lean more actively against inflation persistence, which, as described in the August Report, successive forecasts had under-predicted. These members noted the continued tightness in the labour market: while the vacancies to unemployment ratio was falling, it was still well above long-run average levels. Further, high-frequency private sector wage growth measures had continued to trend upwards, consistent with the possibility that the equilibrium unemployment rate had risen. Key metrics including both core and services CPI inflation had continued to remain high.”

And just one member wanted ‘no change’ from the 5.0 per cent base rate. The Bank says this member felt that “as the policy stance had become increasingly restrictive, there was no longer a strong case for further tightening on risk management grounds. Instead, the risks of overtightening had continued to build, increasing the likelihood of output losses and volatility that would require sharper reversals of policy.”

All this points to one thing – high interest rates are here to stay for some months and possibly years to come.