The Bank of England has pushed interest rates higher as it tries to put a lid on soaring prices after UK inflation unexpectedly jumped higher last month.
The Monetary Policy Committee (MPC) voted seven to two to increase rates from 4% to 4.25%, but said they expect the economy to grow slightly in the second quarter of the year, marking a reversal of the 0.4% decline in gross domestic product (GDP) it had anticipated last month.
Inflation is set to come back down this year despite a surprise increase in Consumer Prices Index (CPI) inflation last month, to 10.4% from 10.1% in January, driven by surging food and drink prices.
“CPI increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year,” the bank said.
It is the 11th time in a row it has hiked interest rates.
The MPC recognised the recent period of volatility in the global banking sector, after the collapse of Silicon Valley Bank and the rescue takeover of Credit Suisse, but stood firm in its mission to bring inflation back down to its 2% target.
“The economy has been subject to a sequence of very large and overlapping shocks,” policymakers said. “Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term.”
The MPC said it would make a “full assessment” of recent banking woes and market volatility in its forecast in May, and that it was monitoring the situation closely.
There was also better news for the country’s jobs market with employment growth in the second quarter likely to be stronger than expected, and a flat rather than rising unemployment rate.
The Chancellor’s spring Budget earlier this month could increase GDP by about 0.3% over coming years, the bank stated.
The MPS was also calmer about the outlook for household energy prices amid the UK Government’s support scheme, with lower prices set to help bring down inflation by the end of the year.
Chris Arcari, head of capital markets at Hymans Robertson, commented: “Yesterday’s upside inflation surprise, alongside an economy that has shown surprising resilience recently, will have emboldened the Bank of England to raise rates 0.25% p.a. today.
“While most forecasts expect inflation to decline reasonably sharply this year, notwithstanding yesterday’s upside surprise and the likely tightening in bank credit standards following weakness in the sector, may mean central bank’s will have less of the leg work to do, there are still ample reasons for the BoE to have raised rates.
“A tight labour market, which is seeing year-on-year wage growth of 6.5% year-on-year, is maintaining pressure on core services inflation, which in turn is keeping central bankers nervous of the possibility a self-fulfilling wage-price spiral takes hold.
“Furthermore, central banks have sufficient tools to provide liquidity to the financial system to ensure financial stability, whilst still raising interest rates to reign in excess demand.”
Luke Bartholomew, senior economist at abrdn, added: “The nasty upside surprise in the February inflation data meant that that by the time the Bank’s decision was announced, it was widely expected by markets despite the recent banking sector troubles.
“This is exactly how the bank’s conditional guidance is meant to work; with expectations for interest rates dynamically adapting to the inflation data, and as such, wage growth and inflation figures over the next month will be crucial for investors in shaping expectations for what happens to interest rates in May.
“Our expectation is that rates have reached their peak for this cycle as the lagged effects of past monetary tightening and financial market volatility start to weigh heavily on the economy.
“However, there is still a significant risk of one final rate increase if inflation proves to be a bit stickier in coming months.”
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