The pressure on the Bank of England intensified today when a shock jump in inflation increased the quandary about whether it should raise interest rates tomorrow, and if so, by how much.
Consumer Price Inflation rose to 10.4% in February, up from 10.1% in January, and far higher than City economists had been forecasting.
That makes it likely that the Bank will put rates up from 4% to 4.25% when its Monetary Policy Committee, chaired by Governor Andrew Bailey, votes at 12pm on Thursday.
Following recent banking collapses and the forced sale of Credit Suisse to UBS, some had begun calling for rates to fall, or at least hold steady.
Investec said in a note: “This hotter-than-expected release makes the monetary policy decision for the MPC tomorrow even more difficult. When deciding the appropriate level of the Bank rate the MPC will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis”
The increasingly stubborn double-digit inflation could give the hawks on the nine-member MPC encouragement, after it voted seven-to-two in February for a 0.50% hike, with the dissenters wanting rates left on hold.
Catherine Mann, one of the MPC’s more hawkish, pro-hike members, said recently that if markets priced in the prospect of UK rates hitting their peak, then that could stoke further inflation.
The doves on the MPC, meanwhile, have been pointing to the risks of taking rates too high. Silvana Tenreyro said recently that the time lag between hikes being made and actually taking effect should be taken into account.
Up until last week, another 0.5 point hike was expected tomorrow, with rates seen reaching their peak somewhere between 4.5% and 5% in 2023, probably in the summer, and then staying there into autumn and winter as lower energy prices help limit inflation.
Then the crisis in the banking sector hit. First in the US, Silicon Valley Bank collapsed and a string of regional lenders needed rescuing. But the state of UK financial institutions is seen as relatively sound and the hammering metered out by investors to share prices in the sector has eased over the last couple of trading sessions.
In the City this week, the odds of a BoE hike tomorrow had fallen to 50-50. Today, they went back up, reaching 96%.
William Marsters, a senior trader at investment platform Saxo, said: “This financial instability has made all central bank rate decisions not as clear-cut,” adding:
“Now a 0.25% hike takes an edge. What is certain is that inflation in the UK seems far from under control, and we can expect more market moves as a result.”
The BoE’s ruling will follow a rate call from the US Federal Reserve due this evening at 6 p.m. London time. It too is expected to lift rates by 0.25%. It will also publish fresh projections on the outlook for rates and the economy.
