Bank of England Increases Interest Rates by 25 BPS

The Bank of England has increased its benchmark rate by 25 bps as anticipated.

According to a statement by the Bank, the Monetary Policy Committee (MPC) voted 7 to 2 to raise rates to 4.5%, with the dissenters preferring to hold rates at 4.25%.

Similar to US policy, the Bank seeks to meet an inflation target of 2%.

The Bank noted that CPI inflation was 10.2% in 2023 Q1, higher than expected at the time of the February and March MPC meetings, with an upside surprise in core goods and food prices. Although still elevated, nominal private sector wage growth and services CPI inflation have been close to expectations.

CPI inflation is expected to fall sharply from April, in part as large rises in the price level one year ago drop out of the annual comparison.

UK GDP is now expected to grow at a “moderate pace” but flat during the first half of the year, and without a “further shock,” increasing rates are predicted to have little impact on GDP.

Employment is expected to remain tighter, with the unemployment rate now projected to remain below 4% until the end of 2024 before rising over the second half of the forecast period to around 4½%.

In the latest projection, CPI inflation declines to a little above 1% at the two and three-year horizons, materially below the 2% target. This reflects the emergence of an increasing degree of economic slack and declining external pressures that are expected to reduce CPI inflation. However, there remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target.

CI received commentary on the rate increase from several financial services firms.

Giles Coghlan, Chief Market Analyst, consulting for HYCM, stated:

“Given that annual inflation remains stubbornly above 10%, today’s decision to raise the base rate by 25bps again was almost unanimously anticipated by the markets. With wage growth data coming in hotter than expected a few weeks ago, fears of a wage-price spiral have only grown since March, and the economy has not cooled to the extent that Bank of England policymakers will have hoped. Right now, core inflation remains sticky at 6.2% year-on-year and investors should expect rates to go higher in the summer even if headline inflation falls sharply, particularly as the markets are now expecting a terminal rate of 4.85%. On a brighter note, the BoE are not forecasting a recession for the UK and have revised GDP up for next year to 0.75% from a prior projected fall of -0.25%.”

Founder and CEO of SmartSave (part of Chetwood Financial), Andy Mielczarek, added that the rate increase was another reminder that inflation is not coming down fast enough and UK consumers are feeling the impact of a higher cost of living.

“According to ONS data, the prices of food and non-alcoholic drinks are rising at the quickest rate in over 45 years – a factor which could lead to further hikes to the base rate this year. One upside for rapid interest rate rises is that consumers and investors should get more interest on their savings. But interest rates for easy-access accounts have often not kept pace with hikes to the base rate, which means that people could be losing out on potential gains on the money held in traditional accounts. For those in a position to put aside a lump sum and allow that pot to grow, it’s vital that savers explore how different savings instruments can support their financial goals. In many cases, fixed-term, fixed-rate bonds can offer much higher interest, while many savers will benefit from looking beyond traditional high street banks.”

Jatin Ondhia, CEO of Shojin, noted that rates now stand at the highest level since 2008, and with inflation still hot, it is not clear how much higher rates will need to go to restore price stability in what has been a historic rise in interest rates.

“Undoubtedly, investors will be hoping that the summit may be drawing near, but for now, the Bank of England’s tricky juggling act looks set to continue. Going into the second half of the year, agility and diversification will be key in navigating the shifting macroeconomic landscape as the tightening of financial conditions continue to feed through into the economy.”

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