Bank of England raises interest rates by 0.25% to 4.25%

The latest inflation data shows that CPI inflation re-accelerated to 10.4% in February.

The Bank of England’s Monetary Policy Committee has voted 7-2 to increase Bank Rate by 0.25% to 4.25% – the 11th consecutive rise.

This follows the latest inflation data which shows that CPI inflation re-accelerated to 10.4% in February, and the US Federal Reserve’s decision to hike rates by 0.25% yesterday.

Two members voted to maintain Bank Rate at 4%.

There had been speculation that the Bank of England would hold rates due to volatile moves in global financial markets including the failure of Silicon Valley Bank and UBS’s purchase of Credit Suisse.

However, the MPC said that the Bank of England’s Financial Policy Committee (FPC) has briefed it about recent global banking sector developments and judges that “the UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.

Additional fiscal support was announced in the Spring Budget which Bank staff estimate could increase the level of GDP by around 0.3% over coming years.

GDP is still likely to have been broadly flat around the turn of the year but is now expected to increase slightly in the second quarter, compared with the 0.4% decline anticipated in the Bank’s February Report.

As the Government’s Energy Price Guarantee will be maintained at £2,500 for three further months from April, the MPC said that real household disposable income “could remain broadly flat in the near term, rather than falling significantly”. In addition, the MPC now predicts stronger-than-expected employment growth in 2023 Q2 and a flat rather than rising unemployment rate.

Despite rising inflation, the Committee still predicts that inflation will “fall significantly” in Q2, to a lower rate than anticipated in the February Report.

This lower-than-expected rate is largely due to the near-term news in the Budget including on the EPG, alongside the falls in wholesale energy prices.

The MPC says it will continue to monitor indications of persistent inflationary pressures, including the tightness of labour market conditions and the behavior of wage growth and services inflation. If there were to be evidence of more persistent pressures, then “further tightening in monetary policy would be required”, the Committee confirmed.

In response to the news, industry experts were split on whether this will be the final hike to interest rates.

Adam Oldfield, chief revenue officer at Phoebus Software, said: “The will they, won’t they of the past few days has now been settled and for most it’s not the decision they were hoping for. Unfortunately, there are many factors weighing heavy on the global economy and recent events in the banking sector have added further to the turmoil. The unexpected rise in inflation announced yesterday, along with the half a per cent rate rise by the Fed, no doubt gave the committee grist to the mill.

“There is the suggestion that the rise in inflation last month was a temporary blip, and we should start to see the numbers coming down again soon. If this is the case, it’s hard to see that the Bank of England will have any cause to put the base rate up again in its next meeting. The problem is that we were just starting to see the housing market moving again, so the news of another increase could well give people further pause for thought.

“The only light is that we’ve seen lenders reducing rates in the last week, so perhaps they may not be as quick to put rates up if current swap rates are baked in. Nevertheless, for those on SVRs or trackers it’s a worrying time and lenders, I’m sure, will be getting their houses in order to ensure exposed borrowers get the support they need.”

Adam Ruddle, chief investment officer at LV=, commented: “The Bank of England’s decision to raise interest rates by 0.25 percentage points is in line with our expectations. The Bank is in a difficult predicament. On the one hand, inflation in February unexpected increased leaving the UK inflation higher than the US and Eurozone. On the other hand, there are some signs that previous increases are weakening the housing sector and hurting the economy; added to that, the recent banking turmoil is in itself a disinflationary pressure. We believe the Bank has sought to balance these considerations whilst remaining clear that managing inflation down is its key responsibility – even if that means subdued economic growth.

“While an increased rate helps tackle inflation it hinders economic growth, increases mortgage payments and squeezes living standards. This week’s figures showing a rise in inflation shows that rising prices remains a stubborn, and potentially domestic, problem. I believe the Bank may continue to raise interest rates to 4.5% over the coming months.”

Garry White, chief investment commentator at Charles Stanley, agreed, stating: “In Jeremy Hunt’s Budget, the Office for National Statistic said it expected inflation to fall to 2.9% by December – but this data makes that target look ambitious. This means there may be at least one more rate rise ahead, but we are probably close to the top of the cycle. However, if this 2.9% target is to be met, interest rates may not be coming down for quite some time.”

Nathaniel Casey, investment strategist at wealth manager Evelyn Partners, said: “The split in voting is indicative of the tricky state of affairs confronting the MPC and other central banks, with committee members having to weigh the fragility of the global banking sector against the need to bring inflation back to target.

“The recent turmoil in the banking sector, which began with collapse of Silicon Valley Bank (SVB) nearly a fortnight ago, has reminded central banks that things can break when monetary policy is rapidly tightened. Although contagion risks from the tech bank crisis and Credit Suisse look to have receded for the time being, the BoE will need to tread carefully if it decides to further tighten monetary policy from here. The Bank recently acknowledged that ‘more sharp moves in asset prices could expose weakness in parts of Britain’s financial system’ in a letter to lawmakers.

“As its primary objective is bringing inflation back towards target, the MPC had little choice but to raise again, as the evidence has been pointing towards continuing price pressures. Yesterday’s inflation data will have ruffled a few feathers among hawks, with the consumer prices index showing that inflation re-accelerated in February with headline and core CPI posting gains of 1.1% and 1.2% respectively for the month.

“The annual rate ticked back up to 10.4% which was a jolt to what the majority of observers had assumed would be a steady downward trajectory for inflation this year. The Bank itself has forecast the annual rate to be around 4% by the end of 2023, which is less ambitious than the OBR’s recent forecast of 2.9%.

“Moreover, the labour market continues to remain tight, putting pressure on wage growth which could further stoke inflation and cause it to become entrenched.

“And finally, for the real economy, recent UK data has been surprising on the upside. February’s PMI readings came in well above consensus with the composite figure reported at 53.0, consistent with a recovery in economic growth. Growth expectations are likely to get a boost as falling energy prices feed through to a reduction in household expenditures, boosting real incomes and stimulating the economy. A boost to growth could cause the inflation to decelerate slower the than the BoE’s forecasts currently expect, which may cause monetary policy to remain tighter for longer in response.”

Richard Carter, head of fixed interest research at Quilter Cheviot, added: “After Tuesday’s inflation figure, the Bank of England had no choice really but to raise interest rates today. It will have been somewhat spooked by inflation rising, and it makes the prediction that inflation will stand at just 2.9% by the end of the year even more difficult to achieve. However, the contagion in the banking system appears to have been contained for now, giving it some cover to raise rates today without being overly concerned it will tip the balance for any banks that are under duress. Furthermore, the UK banking system has much more stringent regulation and capital adequacy rules so the system should be able to handle this rate rise.

“Going forward, it will be hoped this will be the final rate hike before a period of pause to assess how the rate hikes are taking effect. Prior to the surprise inflation stat, there was growing divergence in the Monetary Policy Committee about the most appropriate way forward with rates, particularly given the economy is expected to contract this year though miss falling into recession. Ultimately, inflation continues to be the key driver of interest rates and this will continue to be the case unless the recent banking issues transforms into a full-blown crisis. Inflation is proving sticky so it is hard to say if this is the end, but consumers up and down the country will be hoping for some relief when the Bank of England sets rates again in May.”

Amy Loddington (Financial Reporter)

Retirement ProfessionalsBank of England raises interest rates by 0.25% to 4.25%