The Bank of England raised interest rates by 25% to 4.25 percent despite recent banking turmoil.
This rise was in line economists’ predictions and came a day after data showed an increase in the annual rate of inflation from 10.1% to 10.4% in February.
This is the 11th consecutive rate increase by the bank. Rates were first raised in December 2021.
The BoE left the decision up to them whether to increase interest rates in future meetings open. This was due to the emerging evidence and the uncertainty surrounding the economic and financial outlook.
It stated that “if there was to be further persistent [price] pressures then further tightening of monetary policy would be necessary”, echoing the guidance it provided at its February meeting.
According to the BoE, UK banks are “resilient” in order to support the economy in all economic situations.
It stated that it would monitor closely any market tensions that might affect credit conditions faced households and businesses.
Seven out of nine MPC members voted in favor of the rate hike. They argued that the country’s better outlook for gross domestic products and employment could “reinforce higher consumer prices”.
The BoE stated that consumer price inflation is “still expected to drop significantly” in the second half of the year, “to a lower pace than was anticipated” last month.
This was due to declines in energy prices, and the UK government’s decision not to end a support program that will lower household energy bills for an additional three months .
The unexpected increase in inflation observed in February was partly attributable to higher footwear and clothing prices, which “tends to be volatile” and could prove less persistent, according to the BoE.
It also stated that it did not expect a technical recession in the UK in this year’s UK. The bank added that the GDP would “now be expected to slightly increase in the second quarter”. It had expected a 0.4% decline a month earlier. It added that “GDP is likely to have been broadly flat around this time last year.”
The US Federal Reserve and the European Central Bank both raised interest rate last week despite turmoil in the banking industry, partly due to tighter monetary policies.
After the BoE announcement, the pound traded 0.5% higher against the dollar to $1.2323.
The Gilt yields were also slightly higher with the interest rate sensitive 2-year yield increasing by 0.02 percentage point to 3.38 percent.
The BoE stated that market pricing was implying a further rate rise by the end of summer. This is “somewhat higher than” the peak expected when the MPC last met.
Swati Dhingra, and Silvana Tenreyro (external members of the committee) voted against the decision and voted to keep interest rates at 4%.