With unexpected inflation, the Bank of England raises interest rates by 25 basis points

24 Mar 2023 , 06:38 AM

Notwithstanding a surprising increase in inflation revealed on Wednesday, the Bank of England increased interest rates by another quarter of a percentage point on Thursday and stated that it anticipates the British inflation spike to subside more quickly than before.

The BoE’s nine rate-setters voted 7-2 to raise the Bank Rate by 25 basis points, to 4.25%, sounding more optimistic about the outlook for the modest rate of economic development in the nation.

Although it was the smallest jump since June of last year, that was its 11th straight increase in borrowing prices since December 2021.

Swati Dhingra and Silvana Tenreyro of the Monetary Policy Committee voted against hiking rates, but Catherine Mann supported the very modest 25 basis-point rise. Mann has been the committee’s biggest proponent of raising rates gradually.

The BoE maintained its message that the MPC saw less urgency about extending its quick run of rate hikes. The BoE is seeking to combine a dismal economic forecast and concerns about global banks with stubbornly high inflation.

The tightness of labour market conditions, the behaviour of wage growth, and the inflation of services are all indicators of ongoing inflationary pressures, according to the BoE.

The statement said, ‘Further tightening of monetary policy would be required if there were evidence of more persistent pressures.’

In its announcement on Thursday, the BoE noted that despite inflation’s unexpected increase to 10.4% in February, price growth was still on track to decline significantly between April and June of this year.

Investors were split 50/50 on whether the BoE would leave Bank Rate steady for the first time since November 2021 after the rescue of Credit Suisse and the failure of Silicon Valley Bank as recently as Tuesday – before the most recent inflation figures.

The BoE acknowledged ‘huge and volatile changes’ in global financial markets on Thursday as a result of the banking crisis, but said that Britain’s banking system was still robust.

Despite the turbulence at Credit Suisse, the European Central Bank kept to its plans last week and increased rates by 50 basis points. The Swiss National Bank followed suit on Thursday while cautioning that more increases could not be ruled out.

The U.S. Federal Reserve increased its benchmark interest rates by a quarter of a percentage point on Wednesday and signalled it would soon stop raising them.

The BoE is concerned about the health of the labour market because, despite a recent cooling off, pay growth is still running far above its historical normal and there remains a severe labour shortage. Both of these factors are inflationary.

In December 2021, the BoE began hiking interest rates for the first time among the major central banks, and up until this week, it appeared as though it would follow the Bank of Canada, which had ceased boosting borrowing prices this month.

Investors in rate futures markets were prepared for the BoE to make up to two additional adjustments of 25 basis points by September earlier on Thursday, before the rate decision.

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