In response to higher-than-anticipated UK inflation and indications that Britain’s economy is faring better than feared, the Bank of England increased interest rates by 0.25 percentage points to 4.25%.
The Bank’s monetary policy committee (MPC) voted by a margin of seven to two to raise the base rate for the eleventh consecutive time during a fortnight of heightened unease on the world’s financial markets.
Following an unanticipated increase in the UK inflation rate to 10.4% in February from 10.1% in January, driven by food prices rising at the fastest rate in 45 years, it came into effect. Inflation is expected to reach 2%, according to the Bank.
Financial markets shifted to anticipate a further quarter-point hike at the MPC’s next meeting in May, leading to a rise in the value of the pound relative to the dollar. Analysts pointed out that the likelihood of a 12th and final rate increase to 4.5% was uncertain because there were signs that inflation may decline significantly over the coming months.
The UK’s monetary policy has been aggressively tightened for decades as rates have increased by 4.15 percentage points since December 2021. Despite saying it would only act if there were indications of “persistent pressures” from inflation, Threadneedle Street left the door open for future rate increases.
The Bank’s governor, Andrew Bailey, stated that signs of the price spiral were “peaking”, telling broadcasters, “But of course, it’s far too high. We think it’s going to come down sharply, really from the early summer onwards. But we haven’t seen that happen yet.”
According to the Bank’s optimistic assessment, it is no longer expected that the economy will experience a technical recession, which happens when it contracts for two consecutive quarters. After a previous estimate of a 0.4% decline in activity, the UK’s gross domestic product (GDP) is now likely on course to expand slightly in the second quarter of the year.
“Back at the beginning of February, we were really on a bit of a knife-edge as to whether there would be a recession. Certainly, we thought the economy would be quite stagnant,” Bailey stated. “It’s not off to the races, let’s be clear. But I’m a bit more optimistic.”
Despite concerns about the failure of Silicon Valley Bank and the Swiss government-mediated rescue of Credit Suisse by rival lender UBS, central banks on both sides of the Atlantic have increased interest rates. On Wednesday, the US Federal Reserve raised its benchmark interest rate by.25%, bringing it to a range of 4.75%-5%.
The Bank of England is keeping an eye on the economic effects of the chaotic situation in the banking industry and will provide a comprehensive evaluation in its upcoming economic update in May.
Bailey stated that he is confident that UK banks are in a much stronger position than they were 15 years ago and that the 2008 financial crisis will not be repeated.
Economists have stated that the UK economy will be further weighed down due to turmoil in the global banking system; thus, there may be less need for additional interest rate increases at a time when headline inflation is already forecast to fall sharply.
Silvana Tenreyro and Swati Dhingra, two of the MPC’s external members, rejected a rate increase, arguing that higher borrowing costs were making the economy worse and could hasten the time when rate cuts would be necessary.
Former MPC member David Blanchflower stated that the rise was a “disastrous error” that could lead to a recession. Former MPC member David Blanchflower stated that the rise was a “disastrous error” that could lead to a recession.
“If you look at the Bank’s own forecasts, with what I’ve just said being [a] huge tightening in financial conditions around the world, they should be cutting rates,” he said in an interview with the BBC. “So this is a big incoherence. And the problem is going to be that the data is going to actually swamp them, and I think what you’re going to see is rapid U-turns.”
Despite persistent signs of labor shortages in several sectors of the economy, wage growth appears to have slowed since the COVID pandemic.
According to the measures announced by the chancellor, Jermy Hunt, in last week’s spring budget, the economy could grow by 0.3% while limiting short-term inflation.
It is expected that the government’s extension of the energy price cap at £2,500 for a typical household bill will lower inflation by about one percentage point and that the freezing of fuel duty will result in an additional reduction of one-third of a percentage point from its earlier projections.
According to economists, the Bank of England may decide against raising interest rates for a record-breaking 12th time if inflation declines as anticipated, so a rate increase in May is not yet given.
The impact of the initial price increase after Russia’s invasion of Ukraine a year ago vanished from the annual inflation figures, and it followed a sharp decline in energy prices around the world in recent months.
“Assuming these trends continue, then we think a pause [in rate hikes] in May is likely,” stated an economist at the Dutch bank ING, James Smith.
“That’s also partly dependent on banking sector stability, and, like its peers overseas, the BoE will keep reiterating that it has separate tools that are better suited to maintaining financial stability.”
- Published By Team Timeswire