The Bank of England, Britain’s central bank, has raised interest rates again after UK inflation unexpectedly jumped higher last month.
The bank said on Thursday that its Monetary Policy Committee (MPC) voted by a majority of 7–2 to increase the bank rate by 0.25 percentage points to 4.25 percent. Two members preferred to maintain the rate at 4 percent.
It is the 11th time in a row the Bank has hiked interest rates.
UK inflation saw a surprise rise in February, with the Consumer Prices Index (CPI) increasing to 10.4 percent from 10.1 percent in January, driven by surging food and drink prices.
The MPC said: “CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year.”
The MPC recognised the recent period of volatility in the global banking sector, after the collapse of the Silicon Valley Bank in the United States and the rescue takeover of Credit Suisse, but stood firm in its mission to bring inflation back down to its 2 percent target.
“The economy has been subject to a sequence of very large and overlapping shocks,” policymakers said.
Better Than Expected
The central bank said the UK’s economic growth will be better than it previously predicted.It now expects gross domestic product (GDP) to increase slightly in the three months from the start of April, reversing an earlier forecast that it would fall by 0.4 percent.
“While subdued overall, activity was holding up better than contacts had previously expected, particularly in the consumer services sector,” the bank said.
The government’s decision to cancel a planned £500 rise in energy bills at the start of April will also help households, the bank said.
“Real household disposable income could remain broadly flat in the near term, rather than falling significantly,” said the MPC.
There was also better news for the country’s jobs market with employment growth in the second quarter likely to be stronger than expected, and a flat rather than a rising unemployment rate.
‘Huge Concern’
Following the latest interest rate increase, Chancellor Jeremy Hunt said: “With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone.“That’s why we support the Bank of England’s actions today and why we will continue to play our part in this fight by being responsible with the public finances, alongside providing cost-of-living support worth an average of £3,300 per household over this year and next.”
But the main opposition Labour Party blamed the Conservative government for high mortgage rates and inflation.
Labour’s shadow chancellor Rachel Reeves said the interest rate hike “will be a cause of huge concern for many.”
‘Blunt Instrument’
Responding to the rate hike, David Bharier, head of research at the British Chambers of Commerce, said the decision indicates that the central bank is “still pursuing strong action” following the surprise rise in inflation last month.“However, an interest rate rise alone is a blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks,” he said.
Bharier said that small and medium-sized businesses, like consumers, are “getting hit from both rising prices and rising borrowing costs.”
“The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade,” he added.
The Institute of Economic Affairs (IEA), a London-based free market think tank, also expressed reservations, calling the bank’s decision “boringly predictable.”
IEA Economics Fellow Julian Jessop said: “With inflation so far above its 2 percent target, it was easy to justify another small rate increase, though the MPC has at least switched from half-point to quarter-point hikes.”
But he said: “There was already a strong case for a pause this week to assess the full impact of the tightening of monetary and financial conditions that have already taken place.
“It would certainly be worrying if the MPC has been spooked by just one month’s data on consumer price inflation, given all the other evidence that pipeline price pressures are fading. Monetary policy is supposed to be far more forward-looking than this.”