The Bank of England today increased its base rate by 25 basis points from 4% to 4.25% – the highest level for 15 years.
The rise was expected by many experts and comes as the Bank continues to make curbing inflation a priority with the target rate of CPI remaining at 2%.
CPI inflation unexpectedly surged to 10.4% in February in figures released this week although Chancellor Jeremy Hunt has forecast a fall in the rate of CPI to 2.9% by the end of the year.
{loadposition hidden2The latest Bank rate rise is the 11th in a row. The Bank’s base rate was only 0.1% in March 2020.
The rises have been mainly seen as a tough approach by the Bank to stop inflation spiralling out of control.
The Bank of England’s Monetary Policy Committee (MPC) voted to increase the rate to curb inflation.
The MPC said the inflation of 2% target would not change and further action to curb inflation would be taken if necessary.
Mortgage and savings rates are expected to rise following the latest increase.
In the US this week the Federal Reserve raised its target rate by 25 basis points to a target range of 4.75% to 5% – the highest level for 17 years.
The Bank of England’s Monetary Policy Committee voted by a majority of 7–2 to increase the Bank Rate by 0.25 percentage points, to 4.25%. Two members preferred to maintain Bank Rate at 4%.
The MPC said global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained “elevated.” Wholesale gas futures and oil prices have fallen “materially”, it said.
Despite the banking problems at Silicon Valley Bank and Credit Suisse, the Bank of England’s Financial Policy Committee (FPC) has informed the MPC that the UK banking system maintains “robust capital and strong liquidity positions” and is well placed to continue supporting the economy. The FPC’s assessment is that the UK banking system remains resilient.
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 February Report.
Inflation remains a concern, the MPC said, but it added that CPI inflation is still expected to fall significantly in 2023 Q2, to a lower rate than anticipated in the February Report.
The MPC said the economy had been subject to “a sequence of very large and overlapping shocks” but its main targets “as the adjustment to these shocks continues” is to return CPI inflation to the 2% target sustainably in the medium term.
It said CPI inflation increased unexpectedly in the latest release to 10.4% but it remains likely to “fall sharply” over the rest of the year.
Garry White, chief investment commentator at wealth manager Charles Stanley, said: “Many economists believed the Bank of England would pause its run of interest rate hikes as inflation appeared on course to ease steadily. However, the surprise jump in food inflation at the start of the year largely forced the Bank of England’s hand into making its 11th interest rate rise in 18 months. CPI inflation in January jumped to 10.4% against expectation for a fall to 9.9% – staff shortages in hospitality and rising food process drove the hike.
“The central bank issued reassuring words following recent concerns about the banking sector. The Bank of England’s Financial Policy Committee (FPC) 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. The FPC’s assessment is that the UK banking system remains resilient.
“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.”
Adam Ruddle, chief investment officer at LV=, said: “The Bank is in a difficult predicament. On the one hand, inflation in February unexpectedly 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 remain a stubborn, and potentially domestic, problem. I believe the Bank may continue to raise interest rates to 4.5% over the coming months.”
Dan Howe, head of investment trusts at Janus Henderson Investors, said: “A further uptick in interest rates continues to muddy the waters for UK consumers. With scant few savings products reflecting the base rate, those with money in the bank will feel little change to the speed at which inflation is eating away at their savings. More hard hit will be those households up and down the UK either who have, or are hoping to get, mortgages as their finances will be further pressurised by this increase.”
