(Bloomberg) -- Interest rate rises have been effective in bringing down inflation, according to the Bank of England.
In a paper on how monetary policy transmission works, the UK central bank concluded that rate increases since 2021 have worked by hitting household consumption and business investment.
BOE officials have repeatedly said that raising rates to 5.25% from 0.1%, in what was the quickest tightening cycle for decades, was successful in lowering inflation. The paper published Friday set out the mechanisms that made the policy effective.
“There is evidence that tighter monetary policy weighed on demand,” the authors Natalie Burr and Tim Willems wrote in the BOE’s Quarterly Bulletin released Friday.
The economy fell into a brief recession in 2023 but has been recovering sharply this year, growing 1.4% in the year to May according to the Office for National Statistics. Rates have been held at 5.25% since August last year.
Despite rising aggregate real incomes in 2023, household consumption growth slowed, the paper said. That was evidence that traditional monetary transmission mechanisms are working.
An increase in the savings ratio was consistent with assumptions that the rich would save more to take advantage of high savings rates. At the same time mortgage borrowers cut spending as their debt costs rose, or in anticipation of higher borrowing costs.
“It appears that higher interest rates have been weighing on consumption,” the authors said.
Survey evidence suggested higher rates have reduced business investment, they added, knocking an estimated 8% off firms’ plans and slowing the economy. Housing investment also “weakened materially,” reflecting the fall in housing market activity “consistent with the expected drag from higher rates.”
High rates ensured the pound did not weaken against other currencies, which would have led to imported inflation. Demand for UK exports will have also fallen as foreign countries also depressed demand by raising rates.
The authors said the goal of central banking was to be “boring and predictable.”
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