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Bank of England raises base rate to 4.25 per cent

  • 23/03/2023
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Bank of England raises base rate to 4.25 per cent
Despite predictions towards the end of last week that the base rate was likely to stay static, a surprise rise in the inflation rate has seen the Bank of England’s (BoE) Monetary Policy (MPC) committee lift the base rate by a further 0.25 per cent.

The BoE has raised the base rate to 4.25 per cent, its highest level since the 2008 financial crisis and the 11th consecutive uplift in a row from its historic low of 0.1 per cent in December 2021

The MPC voted by a 7-2 majority to raise interest rates by 0.25 percentage points from four per cent to 4.25 per cent as it tries to curb inflation which climbed to 10.4 per cent in the year to February. Two members preferred to maintain bank rate at four per cent.

At the meeting, the MPC noted that: “The economy has been subject to a sequence of very large and overlapping shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, Consumer Price Index (CPI) inflation will return to the two per cent target sustainably in the medium term. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2 per cent target.”

At the end of last week, Mortgage Solutions reported that, following the failure of US lender Silicon Valley Bank (SVB), experts and markets generally expected the MPC to hold the bank rate at four per cent.

However, those predictions were thrown to the wind as the inflation figures were released on Tuesday indicated a surprise increase. Once economists and experts had digested the rise most predicted this 0.25 per cent uplift.

Indeed, upon the inflation announcement, Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “It had been touch and go about whether the BoE [would] raise rates but now with consumer price inflation rising, it looks increasingly likely a hike will voted through. Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labour market are likely to tip the balance in favour of a rate hike.


What happens now?

A number of commentators have noted that this is likely to be the end of the line for rate rises, but any further uplifts in inflation would undoubtedly see the more hawkish members of the MPC continue to vote for further base rate rises.

However, the MPC noted that it expects inflation to drop markedly in 2023.

It said: “CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year. Services inflation has been broadly in line with expectations. The labour market has remained tight, and the near-term paths of GDP and employment are likely to be somewhat stronger than expected previously. Although nominal wage growth has been weaker than expected, cost and price pressures have remained elevated.

“The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in bank rate so far. Uncertainties around the financial and economic outlook have risen.”

It is those uncertainties that make it almost impossible to predict what will happen to the base rate at the next MPC meeting in May.

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