The Bank of England has hiked interest rates to 4.25%, as it prioritises the fight against inflation over signs of stress in parts of the world financial system.
The seven-to-two vote for the rise of a quarter of a percentage point follows a shock rise in the consumer price index earlier this week, leaving inflation stuck in double digits at 10.4%, much higher than had been expected.
The FTSE 100 ended the day in the red following the decision by the BoE, which matched a similar rise the Federal Reserve in the US.
Sentiment was weak across Europe at the start of trading, driven by the Federal Reserve’s continued aggression to stave off inflation and held firm after the Bank followed suit, although trading became more settled later in the day.
London’s top index moved 0.89%, or 68.24 points, lower to finish at 7,499.6.
The cost of thousands of variable rate mortgages will go up as a result of the rate hike, adding to the pressure on household budgets. Londoners are likely to be particularly hit, due to the higher property costs across much of the capital.
But the hike came with growing talk in the City that rates could now be nearer their peak than previously thought, after the hikes at a range of major central banks has led to stress in the financial sector, where big-name banks have failed or needed rescuing in the US and Europe.
The Bank gave a surprise upgrade to its forecast for the UK economy, saying it now expects slight growth in the second quarter of the year having anticipated last month it would decline by 0.4%.
It means the country would avoid imminently falling into a recession – which is defined as two consecutive quarters of negative growth.
The Bank’s governor, Andrew Bailey, said: “Back at the beginning of February, we were really a bit on a knife edge as to whether there would be a recession, certainly we thought the economy would be quite stagnant.
“I’m not saying it’s off to the races, let’s be clear, but I am a bit more optimistic,” he said.
Some economists think rates may already have peaked, with others pointing to another quarter-point later in the year from the nine-member Monetary Policy Committee, taking the base rate to 4.5%. Previously, they were seen going further toward 5% into the summer, before sticking there for the rest of 2023.
Joe Nellis, professor of global economy at Cranfield School of Management, said: “The Bank of England must pause and wait to see if inflation plummets in the months ahead.
“A sharp fall is expected now that supply chain bottlenecks are easing, and the inflationary impact of Russia’s invasion of Ukraine a year ago will fall away in the coming months.”
Today’s eleventh consecutive rate rise comes after the BoE was the first major central bank to start lifting rates in December 2021, in a bid to contain inflation, which was sent higher via rising energy costs after Russia’s invasion of Ukraine.
Inflation reached its highest in over four decades at 11.1% in October and did not fall back under double digits as expected for February’s reading, which was published this week.
James Hughes at Scope Markets said: “Yesterday’s surprise jump in UK inflation gave the Bank of England little option but to push ahead.
“That said, the hike is smaller than we’ve seen previously and there are plenty of suggestions that we may now be at the top of the cycle. With energy prices tipped to fall dramatically in the months ahead, the Bank – and indeed No. 11 – will be keen to ensure that deflation isn’t dominating headlines by the autumn.”
Rising interest rates have rippled through the financial sector, eroding the value of government bonds held by banks by reducing demand for them, adding to the stress on balance sheets. Lenders including the collapsed Silicon Valley Bank and the rescued Credit Suisse came under pressure in part because of the fast pace of rate hikes.
Overnight, the Federal Reserve took US interest rates up, also by a quarter point, taking the top end of its Fed Funds range to 5%, the highest since 2007. The European Central Bank pressed ahead with a half-point hike last week, taking its deposit rate to 3%, even with the Credit Suisse crisis in full swing. The Swiss National Bank also lifted its rates by a half point yesterday, to 1.5%.
