The UK central bank raised its benchmark lending rate on Thursday by a quarter point to 4.25%, the highest since 2008, and left the door open to further increases if inflation persists.
The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 for the rate hike, with none of the UK central bank’s staff joining the dissent.
“The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.25%, at this meeting,” said the UK central bank.
“CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year. Services inflation has been broadly in line with expectations.
“The labour market has remained tight, and the near-term paths of GDP and employment are likely to be somewhat stronger than expected previously. Although nominal wage growth has been weaker than expected, cost and price pressures have remained elevated.
“The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. Uncertainties around the financial and economic outlook have risen.
“The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour 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.”
Victoria Scholar, Head of Investment, Interactive Investor: “This is the eleventh rate increase since December 2021 as the central bank approaches the peak of its rate hiking cycle. However the vote split was not unanimous with monetary policy committee members voting 7-2 in favour of a hike. Dissenters Silvana Tenreyro and Dr Swati Dhingra wished to keep rates on hold.
“The Bank of England has followed the ECB and the Fed with another round of monetary tightening, focusing on the elevated inflation backdrop rather than the potential deflationary fallout from the turmoil in the banking sector.
“The central bank tried to alleviate concerns about the stress across financials, saying it will continue to monitor credit conditions closely, adding that the banking system remains robust, and liquidity is resilient. The Bank of England said the system is well placed to support the economy, including in a period of high interest rates.
“In terms of the central bank’s forecasts, it issued a rosier assessment of the UK’s economic outlook, saying its Q2 GDP forecast will ‘increase slightly’ versus its February forecast of -0.4% but its Q1 GDP forecast remains unchanged at -0.1%.
“It suggested that the latest inflation spike could be temporary, reflecting the volatile nature of clothing prices. It is sticking to its view that CPI should fall over the remainder of 2023, partly thanks to wage growth which is seen falling back somewhat faster than expected.
“Sterling bulls are in the driving seat with the pound extending its recent rally. The upswing for cable (GBPUSD) has been exacerbated by recent weakness for the greenback, under pressure after the Fed carried out a dovish hike on Wednesday. Meanwhile the FTSE 100 remains in the red, underperforming wider European equities as the cost of borrowing in the UK becomes more expensive yet again.
“For the estimated 1.6 million households on variable and tracker mortgage deals, this means more expensive monthly repayments, squeezing household budgets and in turn potentially dampening consumer spending. While higher interest rates are a boon for savers, with inflation stuck in double digits above 10%, real term savings rates unfortunately remain in negative territory.”
Daniel Mahoney, UK Economist at Handelsbanken: “The trade-off between price stability and financial stability that was facing the Bank of England (BoE) at this meeting, especially after yesterday’s inflation figures, was always likely to lead to MPC members being split at today’s decision.
“The BoE has decided to increase rates by 25bp up to 4.25%, with 7 members voting in favour of this increase and 2 members dissenting from this view by backing no change in rates.
“The majority of MPC members backed an increase of 25bp due continuing tightness in the labour market and yesterday’s headline CPI inflation surprising on the upside, while the two members voting for no change argued that past rate increases would be sufficient to get inflation below target in the medium term …
“The BoE has set out guidance saying that further monetary policy tightening could be required. Yesterday the Federal Reserve increased interest rates by 25bp. However, investors are now expecting that US rates have finally peaked and that they will start falling later this year. This is significant in looking at how the BoE will act moving forward.
“The primary driver of Sterling’s exchange rate remains interest rates, and the differentials between the BoE against the Fed and the ECB is material. MPC members are of course mindful of the impact of exchange rates on future inflation and expectations particularly given the UK’s high import-dependence.
“However given the market-implied pathway of future US interest rates, there is reason to suggest that the MPC no longer needs to worry about widening interest rate differentials leading to Sterling depreciating against the Dollar, which in turn reduces the pressure on rate setters to further increase rates.
“This, accompanied with the more consequential impact of financial stability concerns arising from recent financial turbulence, re-enforces our view that the BoE has now reached its peak level of interest rates.
“However, the MPC have highlighted that uncertainties around the financial and economic outlook have risen and returning inflation to the 2% target will remain a challenge, especially as services inflation may prove to be particularly sticky, so rates may remain at 4.25% at a number of future MPC meetings this year …
“QT continues in the background. The Asset Purchase Programme’s (APP’s) stock of gilts sits at just under 820bn GBP, down from its peak of 875bn GBP (total assets in the APP had been £895, as there were also 20bn GBP in corporate bonds). As the next asset to mature in the programme would be in July this year, the Bank has been actively selling some of its holdings to ensure a smooth pathway of QT.
“Around 20bn GBP has been actively sold so far. No announcement has been made at the latest meeting on QT, meaning previously announced policy is assumed and a further 20bn GBP of sales is set to take place before July. The impact of QT remains debatable, but our recent research report estimated it could easily be equivalent to 50bp in tightening by mid-2025.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A banking curve ball has been thrown into the Bank of England’s already tricky juggling act, but for now the eye of policymakers is still firmly trained on catching inflation and bringing it under control.
“The hotter than expected temperature of consumer prices in February, and the tight labour market are cause for concern, amid worries inflation could still become embedded in the economy.
“It wasn’t a unanimous decision though, with the Monetary Policy Committee split on what to do, given how rapidly the sands have been shifting. The pound has climbed higher above $1.23 adding to gains already made amid widespread expectations of this rate rise.
“The knock-on effects of the banking scare are still hard to determine, and with lending criteria expected to be tightened and loans set to be harder to come by, a forecast deterioration in financial conditions is likely to be the equivalent to further interest rate rises in the months to come.
“Inflation was already expected to drop sharply by the end of the year to around 2.9% and if consumers and companies find it harder to access credit, it’s likely to be a fresh disinflationary force. So, in May policymakers are expected to press pause on rate hikes, as the lag effect of tightening across the economy comes into play.’’
David Bharier, Head of Research at the British Chambers of Commerce: “Today’s decision to increase the interest rate indicates the Bank are still pursuing strong action following yesterday’s surprise rise in inflation.
“Record high inflation remains the top issue of concern for SMEs, and it has been wiping out their ability to invest and grow for almost two years now.
“However, an interest rate rise alone is a blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks.
“The cost-of-living crisis and the cost of doing business crisis are two sides of the same coin and SMEs, like consumers, are getting hit from both rising prices and rising borrowing costs. The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade.”
Lily Megson, Policy Director at My Pension Expert: “Yesterday’s shock jump in inflation may have tipped the balance, encouraging this further hike in interest rates. Consumers’ reactions will likely be mixed.
“Rising interest rates would typically be beneficial for savers and pension planners. However, the base rate is still less than half the rate of inflation, meaning savings are losing value in real terms, which is placing relentless pressure on millions of people’s finances.
“It comes as little surprise, therefore, that My Pension Expert’s own research found that over two fifths (43%) of people believe that the current economic environment is derailing their financial plan. Elsewhere, over a third (34%) of Britons cite rising interest rates as the reason for delaying their retirement.
“In such uncertain times, it is vital that everyone – not just society’s most affluent – feel able to safeguard themselves from economic uncertainty. So, it is important that they have access to the right support.
“From clear, jargon-free information to accessible independent financial advice, the government, regulators, and the financial services industry itself, must work together to ensure everyone has the help they need to weather this financial storm.
“In doing so, Britons will be able to better understand their financial situation and make informed decisions to protect their financial future.”
Richard Carter, head of fixed interest research at Quilter Cheviot: “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.”
Jonathan Moyes, Head of Investment Research, Wealth Club: “The Bank’s hands have been tied by the 0.25% rate rise in the US and the higher than-expected UK inflation print earlier in the week. A 0.25% rise was expected.
“However, we understand why there is a growing chorus of commentators calling for a pause here. The US and Europe have come very close to a banking crisis over the previous two weeks and monetary conditions will tighten significantly as a result, placing further strain on the sector.
“We will have to wait for the May report to get the MPC’s full assessment of the recent turmoil, however, it is pleasing to see the FPC reiterate its confidence in the strength of the UK banking sector.
“With inflation expected to fall rapidly in the near term and interest rates close to their peak, it seems the inflation beast has been tamed. However, we may soon discover “the cure is worse than the disease” as the banking sector groans under the weight of aggressive rate rises.”
Kevin Brown, savings specialist at Scottish Friendly: “The shock announcement yesterday that inflation had spiked after falling for three consecutive months, has left the Monetary Policy Committee with little option but to hike rates once again.
“Nervousness about the stability of the global financial system had raised question marks over whether central banks could push through further rate rises at the time, but inflationary pressures continue to unsettle central banks.
“Ultimately, inflation remains the greatest threat to the UK economy and it’s what the government and the Monetary Policy Committee have their eyes firmly set on.
“But it’s a double blow for households who are still grappling with surging prices, particularly on food and drink, and will now also face higher borrowing costs.
“The only silver lining will be if banks and building societies pass on the rise in base rate to savers. By shopping around savers can find some accounts paying over 4.5% but with inflation where it is, anything above and beyond this would be extremely welcome.
“However, we are a long way from saving rates exceeding inflation, so the best bet for anyone looking for higher returns may be to invest their money instead.”