The Bank of England (BoE) has announced a quarter-point interest rate increase, taking the base rate to 4.25%, in response to higher-than-expected inflation and positive indications regarding the state of the UK economy. This marks the 11th consecutive rate rise, with the move driven by a majority vote of seven to two from the BoE’s Monetary Policy Committee (MPC). The decision was made following an unexpected inflation rise in February, with the rate increasing to 10.4% from January’s 10.1%, which was driven by rapidly rising food prices. The Bank’s official target for inflation is 2%.
Despite the decision, the Bank left open the possibility of a further rate increase but stated that it would only take such action if “persistent pressures” from inflation occurred. Andrew Bailey, the Bank’s governor, stated that there were indications that the price spiral was “peaking” but added that it was still far too high, expecting it to fall sharply from the summer onwards.
The Bank’s announcement has led to a rise in the value of the pound against the dollar, and economists anticipate one more quarter-point increase at the next MPC meeting in May. However, a final increase to 4.5% could hang in the balance, particularly if inflation falls as expected in the coming months.
The rate increase represents the most significant tightening of UK monetary policy for several decades, with rates now up by 4.15 percentage points since December 2021. While central banks in both the US and the UK have been pushing ahead with rate increases, concerns remain regarding the collapse of Silicon Valley Bank and the rescue of Credit Suisse by rival lender UBS. The Bank of England has indicated that it is closely monitoring the effect of the banking turbulence on the UK economy, with a full assessment to be issued in May.
Although two external members of the MPC voted against the rate increase, the Bank indicated that it no longer expects a technical recession, and UK gross domestic product is now anticipated to show slight growth in Q2 2023. Furthermore, the measures taken by the Chancellor in the Spring Budget are expected to help the economy grow by 0.3% over the coming years while limiting short-term inflation.
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