Bank of England Raises Rates by 25 Basis Points Following Feds 50 BPS Increase

The Bank of England, Monetary Policy Committee (MPC), has announced a 25 basis point increase bringing its Bank Rate to 1%.

According to a statement by the BoE, the MPC voted by 6-3 to increase Bank Rate by 0.25 percentage points. Those members in the minority preferred to increase Bank Rate by 0.5 bps, to 1.25%.

The Bank is moving to battle extreme inflationary pressures that have been driven by various exogenous events such as the war in Ukraine, supply chain issues, COVID, and some public programs that may have been inflationary.

Twelve-month CPI inflation rose to 7.0% in March, around 1 percentage point higher than expected in the February Report. The Bank holds an inflation target of 2%.

CPI inflation is expected to rise further over the remainder of 2022, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4.

Consumer price inflation is expected to peak later in the United Kingdom than in many other economies, and may therefore fall back later.

Omar El-Gazzar, FX Dealer, at Crown Agents Bank, commented on the Bank’s decision:

“A key day today – The Bank of England has raised interest rates by 25 basis points as was widely expected, putting the UK base rate at 1%, its highest level since 2009. The BOE faced a tough decision going into the meeting as the committee tried to balance increased inflation projections against lower growth estimates. The vote however came in at 6-3 for a rise, against an 8-1 expectation; this more dovish outcome has pushed cable firmly below 1.25.”

Douglas Grant, Group CEO at Manx Financial Group PLC, shared:

“Interest rates have reached a thirteen year high as inflation continues to rise, exacerbating the cost of living crisis. We believe that demand for working capital is set to soar to unprecedented levels as more businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and additional pandemic-induced headwinds. With the cost of borrowing set to increase, many SMEs are struggling and will continue to be challenged this year. Having successfully deployed multiple relief schemes – BBLS, CBILS and RLS – for SMEs throughout the pandemic, the UK government should, in our opinion, now turn their attention towards a permanent loan scheme to help leverage businesses going forward. Now is a vital time for the Government to work together with traditional and alternative lenders to guarantee the future of our SMEs and to ensure the successes of these emergency schemes are not wasted.”

Grant said that post COVID many SMEs are at a tipping point between surviving and thriving:

“As the government looks for ways to power the economy’s resurgence, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies, and in turn, our economy. SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed rate loans to prevent additional exposure to an increasingly volatile lending market.”

The FTSE rose on the news, aided perhaps by the Fed’s statement that a 75 bps increase is currently not on the table for future increases.

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