The Bank of England has increased interest rates by a quarter of a percentage point to 4.25 per cent, despite the turmoil that has engulfed banking in recent weeks.
The rise, which was in line with economists’ forecasts, comes a day after the latest data showed that the annual rate of inflation jumped from 10.1 per cent to 10.4 per cent in February.
It is the 11th consecutive increase from the Bank of England, which started raising rates in December 2021.
The BoE said it judged UK banks to be “resilient” and “well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.
It added it would “monitor closely” any effect market tensions might have on the credit conditions faced by households and businesses.
Seven of the MPC’s nine members voted for the rate increase, arguing that the country’s stronger outlook for GDP and employment could “reinforce the persistence of higher costs in consumer prices”.
But the BoE said that consumer price inflation was “still expected to fall significantly” in the second quarter of this year “to a lower rate than anticipated” last month.
It said this was largely because of declines in energy prices and the UK government’s decision to maintain subsidies that reduce household energy bills for a further three months.
February’s surprise rise in inflation was partly due to higher clothing and footwear prices that “tend to be volatile and could therefore prove less persistent”, said the BoE.
The bank also suggested that it no longer expected a technical recession in the UK this year, adding that gross domestic product “was now expected to increase slightly in the second quarter”. By contrast, a month ago, it expected a 0.4 per cent decline. “GDP is still likely to have been broadly flat around the turn of the year,” it added.
Both the European Central Bank and US Federal Reserve have also raised interest rates in the last week, despite the turmoil in the banking sector, which was partly triggered by tighter monetary policy.
The pound edged higher against the dollar after the BoE announcement, extending earlier gains to trade 0.5 per cent higher on the day at $1.2323.
Gilt yields also moved marginally higher, with the interest rate sensitive two-year yield rising by 0.02 percentage points to 3.38 per cent.
The BoE noted that current market pricing implied one further rate increase by the end of the summer, with a peak a little above 4.5 per cent in August, “somewhat higher” than the expected peak when the MPC last met.
Two external members of the committee, Swati Dhingra and Silvana Tenreyro, dissented from the decision, voting to leave interest rates unchanged at 4 per cent.
Source: Economy - ft.com
