Rate rise warning is sign tackling inflation is Bank of England’s priority | Larry Elliott

An interest rate rise is coming and it is coming fast. That was the clear message from the Bank of England in a marked shift in its policy stance from supporting growth to tackling inflation.

Back in November when Threadneedle Street raised borrowing costs for the first time in a decade it sugared the pill with some doveish language that suggested there would only be two further increases over the next three years.

This time the Bank has done the precise opposite. All nine members of the monetary policy committee voted for rates to remain on hold at 0.5% but the rhetoric was markedly more muscular.

The key judgement is that monetary policy now needs to be tightened more quickly and to a greater extent than anticipated at the time of the November inflation report. Previously, the City had been split 50:50 on the chances of an increase in interest rates to 0.75% in May. The latest commentary from the Bank will shift the dial decisively towards a move in three months time.

The Bank doesn’t think the economy is booming despite raising its forecasts on the back of an improving global economy. It thinks GDP will increase by about 1.75% a year between 2018 and 2020 – modest by historic standards.

The problem as the MPC sees it is that the economy only has the potential to grow by 1.5% a year as the spare capacity that resulted from the deep recession of a decade ago has been used up. Actual growth of 1.75% against potential growth of 1.5% means inflation above the government’s target of 2% and that in turn requires higher interest rates.

The Bank has been consistently wrong about the amount of slack in the economy in the past. In particular, it has under-estimated how far unemployment can fall without leading to wage pressures building, and has now cut that forecast again to 4.25% in the latest report.

But unless something seriously bad happens to the economy, businesses and consumers are being softened up for a spring rate rise.