Bank of England raises UK interest rates to 4.25%

After the rise in inflation to 10.4%, the Bank of England has stepped in with a further 0.25% rise in the interest rate to 4.25%

Fears that hiking interest rates is not diffusing the inflationary climate, the Bank once again increased rates, albeit not by the 0.5% policy it had pursued for the last six months.

Once again a majority of the monetary policy committee (MPC) voted for a rise with seven to two members in favour. Only two members voted to maintain rates at 4%.

Despite concerns about global banking sector developments, the Bank stressed that the ‘UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates’.

The Bank also said that inflation will fall, although this month’s rise to 10.4% was unexpected.

‘CPI inflation is still expected to fall significantly in 2023 Q2, to a lower rate than anticipated in February,’ the Bank said. ‘This lower-than-expected rate is largely due to the near-term news in the Budget including on the energy price guarantee, alongside the falls in wholesale energy prices.

‘Services CPI inflation is expected to remain broadly unchanged in the near term, but wage growth is likely to fall back somewhat more quickly than projected in February.’

Any future fall in inflation will be due ‘largely to falls in wholesale gas future prices’, although the Bank will not hesitate to hike interest rates if this does not happen. However, the Bank expects inflation to be 4% in a year’s time, still higher than the government’s target figure of 2% which the Bank is expected to maintain.

Clearly the Bank has not stopped its interest rates rises and reported that ‘uncertainties around the financial and economic outlook have risen’. Going forward, it stressed that ‘if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required’.

Growth prospects have improved, with the Bank expecting GDP to increase slightly in the second quarter, compared with a 0.4% decline noted last month.

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