Closing post
Time for a quick recap.
The Bank of England has raised interest rates for the 11th time in a row, taking Bank Rate to 4.25%, despite the turmoil in the banking sector.
Amnnouncing the move, the BoE also predicted that the surprise resurgence in inflation would probably fade fast. Some economists predict that interest rates could now be at their peak, but others suspect rates will rise again to 4.5% by this summer.
The decision split the MPC, with seven policymakers backing the rise and two voting to leave interest rates unchanged.
Chancellor Jeremy Hunt welcomed the move, saying it was important to get a grip on inflation. But his Labour shadow, Rachel Reeves, says the rate rise would be a source of huge concern for families across the country.
The Bank of England raised its forecast for the UK economy in the second quarter of this year, thanks to measures in last week’s budget, and no longer expects a recession this year.
BoE governor Andrew Bailey has told broadcasters:
“We were really a bit on a knife edge as to whether there would be a recession... but I’m a bit more optimistic now.
Bailey also insisted that raising interest rate would bring inflation down to the Bank’s 2% target:
Andrew Bailey explains why we have raised rates by 0.25% today. Inflation is still too high, but we continue to expect it to fall sharply from the middle of this year. Raising interest rates is the best way we have of making sure that happens. pic.twitter.com/kwhowGRZoa
— Bank of England (@bankofengland) March 23, 2023
But the Bank also warned that risk sentiment had reversed and volatility had picked up following the collapse of Silicon Valley Bank.
The rate rise is likely to cool the UK economy, with former MPC member Danny Blanchflower calling it a ‘disastrous error’.
OK so here is MPC FEB forecast for no growth for years
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) March 23, 2023
Why would you raise rates to make growth even slower
Beats me sorry pic.twitter.com/X3nOXaUA7G
One Guardian reader, Kevin G, also questions whether hiking borrowing costs will actually cool the UK’s inflation porblem, pointing out:
To my understanding, this inflation is being caused by the high cost of gas and energy, the rising cost of food which is set by the supplier, basically things that are out of control of the regular people.
How is raising the interest rate going to cause the decrease in the things that are out of the control of the UK population?
The Unite union urged Britain’s biggest banks to pass on higher interest rates to savers, citing new figures showing they have made an extra £7bn by refusing to do so.
In other news….
A third of care homes across England have considered closing during the past year because of “financially crippling” running costs, as concerns rise that gas suppliers are profiteering at the expense of small businesses.
The sub-prime lender Amigo Loans is to be liquidated after it failed to raise enough money to fund compensation to customers.
Lloyd’s of London has swung to an annual loss as it paid out more than £21bn to customers for claims relating to the war in Ukraine and Hurricane Ian in the US.
The home improvement retailer Wickes has said the outlook for its UK business remains “bright“, buoyed by young renters spending more to spruce up their accommodation.
Analysis: Is this the end of UK interest rate rises or are there more to come?
The question now is whether the Bank of England will opt for a 12th interest rate rise in a row, or hold rates at their current level, my colleague Phillip Inman writes:
Markets are pricing in a further small hike to 4.5%. However, a glance at the forecasts for inflation show it declining rapidly this year, mostly in response to a dramatic fall in energy costs. While wholesale gas prices are expected to be double the pre-pandemic level next year, they will have fallen back from the five-fold increase in 2022.
Strong wages growth, which for more than a year has been the central bank’s main worry, began to wane last November and has been largely flat ever since.
By next spring the consumer prices index will be below the 2% target level. On this most forecasters agree. So why carry on raising rates now when the job is done, if the only job is to bring inflation down to the target level?
This point persuaded monetary policy committee (MPC) member’s Silvana Tenreyro and Swati Dhingra to vote against a rate rise from 4%, just as they both objected to the increase from 3.5% in February.
The Bank’s remaining seven MPC members, including the governor Andrew Bailey, indicated that the strength of the economy underpinned their decision for a further base rate increase to 4.25%.
Updated
The crisis in the banking sector could force the Bank of England, or the Federal Reserve (or both) to halt interest rate hikes “prematurely”, says Pushpin Singh, economist at the Centre for Economics and Business Research.
That could lead to upticks in the rate of inflation in the coming months, Singh adds, saying:
Consequently, central banks, including the Fed and the BoE find themselves in a precarious position, and will be monitoring developments in the banking sector closely to determine whether the banking system turmoil may have a disinflationary impact, and whether there is a need to curb interest rate rises.
Nonetheless, the higher interest rates announced today combined with a possible worsening of access to credit due to banking problems paint a difficult picture for business activity, a key contributor to GDP growth.
The Bank of England’s decision to increase interest rates to 4.25% could push the economy into “a full-blown recession”, says Joe Nellis, professor of global economy at Cranfield School of Management.
A growth recession was inevitable prior to the rise, but the vote by the MPC will only delay any prospects for an economic recovery.
Why has the Monetary Policy Committee voted to make matters worse? Households are already facing the biggest fall in their living standards for many decades, and the banking sector is under strain. Further interest rate rises will do more harm than good at this stage.
Nellis argues that the BoE must now pause and wait to see if inflation plummets in the months ahead, as it hopes, adding:
A sharp fall is expected now that supply chain bottlenecks are easing, and the inflationary impact of Russia’s invasion of Ukraine a year ago will fall away in the coming months.”
The Bank of England actually voted on interest rates at a meeting yesterday, before announcing the decision at noon today, as is its policy.
Reader Andrew has asked whether, when the Monetary Policy Committee voted, it knew that the US Federal Reserve was going to announce a quarter-point rate rise last night.
I’ve checked with the Bank, and they say that no, the MPC members would not have known the Fed decision before their meeting.
Today’s minutes point out that market pricing was consistent with expectations of an increase in the Federal Funds rate of around 20 basis points, so the MPC could have used that as a guide.
Updated
Today’s interest rate rise could be a blow to small businesses, by driving up borrowing costs and hitting consumer spending, says Michael McGowan, managing director of Bibby Foreign Exchange.
“Today’s MPC decision may well have been a necessary evil to protect UK’s weakened economy, but it won’t feel like that in the short-term for small businesses struggling to maintain profitability.
Higher interest rates will squeeze consumer spending and raise borrowing costs for businesses. The impact on the Pound should also be closely monitored by SMEs trading internationally as currency volatility remains one of the only certainties in today’s unsettled outlook.
Robust foreign exchange strategies will be critical for SMEs to retain profit margins in 2023.”
Inflation likely to 'drop sharply' this year
Tommaso Aquilante, associate director of economic research at Dun & Bradstreet, is hopeful that inflation will indeed drop this year, as the Bank of England predicts.
Aquilante says:
“Stubborn headline and core inflation in February lead the Bank of England to press ahead with rate hikes. There are however good reasons to think that inflation will drop sharply in late 2023 to reach a new and happier medium.
Booming energy prices and supply chain bottlenecks that contributed to the surge in inflation in 2022 are now gradually subsiding, and the steep price increases experienced last year won’t factor into this year’s inflation calculations.
Today’s rise could prove to be the last hike of the tightening cycle, predicts Capital Economics, who believe stronger data would be required for more rate hikes
Ruth Gregory, their deputy chief UK economist, adds:
But if wage growth and CPI services inflation strengthen further, rates could well rise to our forecast of 4.50%.
Either way, the turmoil in the banking sector makes us a bit more confident in our view that rates will be cut in 2024 to around 3.00%, which is more than is widely expected.
S&P Global Market Intelligence have predicted that today’s hike ends the tightening cycle in UK interest rates.
They say:
The MPC steps back because of the stuttering post-COVID-19 recovery, improved inflation prospects and the lagged impact of the recent rate increases still needing to come through.
But even so, today’s interest rate hike to 4.25% adds a further layer of pressure to already squeezed family budgets.
Accumulating mortgage borrowing costs will play an important part to play to subdue consumer spending and tame inflation, allowing the BoE to take its foot off the tightening cycle.
Updated
Today’s decision on interest rates will not have been easy, says Anna Leach, Deputy Chief Economist at the CBI:
“The interest rate decision was a tricky one for the MPC, taking place against the backdrop of recent global financial market turbulence, a surprise rise in domestic inflation and a Budget which provided more support for the economy.
“The choice to raise rates to 4.25% comes against a backdrop of stronger-than-expected activity so far this year, and strong domestic inflation.
“The MPC will also have an eye to the recent turmoil in the banking sector. While financial stability is the remit of the FPC, an excessive tightening in credit conditions for businesses and households arising from financial market turbulence could cause the MPC to reconsider the level of interest rates in future months.”
Bailey: This may not be the peak of interest rates
The governor of the Bank of England has warned that interest rates may need to be raised higher than their new level of 4.25%.
BoE Governor Andrew Bailey has told broadcasters:
“We don’t know whether it’s going to be the peak.
What I can tell you is that we’ve seen signs of inflation really peaking now. But of course it’s far too high.... We need to see it starting to come down progressively and get back to target.
NEW:
— Faisal Islam (@faisalislam) March 23, 2023
Bank of England Governor Andrew Bailey tells broadcasters that he is ‘much more hopeful’ that the UK can avoid a recession.
Mr Bailey was speaking after the Bank decided to raise rates for an 11th consecutive meeting.
NEW The governor said that back in February the Bank was ‘a bit on a knife edge as to whether there would be a recession’ but now was a ‘bit more optimistic’ about the outlook.
— Faisal Islam (@faisalislam) March 23, 2023
He warned however that the UK economy is ‘not off to the races’.
NEW Governor Bailey:
— Faisal Islam (@faisalislam) March 23, 2023
‘I don’t think it is a repeat of 2008.’
‘I think we've got a banking system that is safe and sound and of course, it's one that people can rely on.’ He said when asked to reflect on current global banking fragility
Mr Bailey refused to say whether he thought UK interest rates has reached a peak.
— Faisal Islam (@faisalislam) March 23, 2023
‘We don’t know if it is going to be the peak, but what we can tell you is that we’ve seen signs of inflation really peaking now, but of course it is far too high’.
NEW. Bailey: “There are signs of calming down and of course that's encouraging. as we noted today, some signs wage increases in the private sector beginning to even off & come down. So that's, that's that's obviously a good sign in terms of inflationary pressures in the economy”
— Faisal Islam (@faisalislam) March 23, 2023
Bailey has also recorded a video, in which he explains that “low and stable inflation is the foundation of a healthy economy,” and that raising rates is the “best tool” to bring inflation down.
Bailey says:
We know people are worried about the cost of living, and they rightly think that inflation is too high.
Bailey predicts that inflation will begin to fall “quite rapidly” before the summer, but yesterday’s inflation report shows that the Bank needs to see that actually happen.
I can assure you, we will go on making the decisions needed to achieve sustained low inflation in this country.
Andrew Bailey explains why we have raised rates by 0.25% today. Inflation is still too high, but we continue to expect it to fall sharply from the middle of this year. Raising interest rates is the best way we have of making sure that happens. pic.twitter.com/kwhowGRZoa
— Bank of England (@bankofengland) March 23, 2023
Updated
The minutes of this week’s Bank of England meeting point out that “bank wholesale funding costs have risen in the United Kingdom and other advanced economies”, following the failure of Silicon Valley Bank and in the run-up to UBS’s purchase of Credit Suisse.
They add:
The MPC will continue to monitor closely any effects on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook.
Tighter fund conditions can potentially act as a substitute for additional monetary policy tightening.
From the Bank of England MPC summary on reasons for rate decision: ‘Reflecting these developments, bank wholesale funding costs have risen in the United Kingdom and other advanced economies.’
— Andy Verity (@andyverity) March 23, 2023
Sound familiar? I got credit crunch deja vu…https://t.co/L016SlEYGO
Bank of England increases the Bank Rate by 25bps to 4.25%; as expected. By comparison to @federalreserve statement the @bankofengland cites rising bank wholesale funding costs as a negative feedback loop impacting credit conditions on households and businesses and overall
— GM (@melchigr) March 23, 2023
Updated
Blanchflower: Rate rise is 'disastrous error'
We covered this morning (9.30am) that former Bank of England policymaker Danny Blanchflower had been pushing the BoE to cut interest rates today.
Blanchflower has now told BBC Radio 4’s World at One that the decision to raise interest rates to 4.25 percent is a “disastrous error” that could contribute to a recession.
MPC raised rates even tho Bank staff continued to expect GDP to decline by 0.1% in 2023 Q1, and for there to be zero growth for three years....and for inflation to collapse
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) March 23, 2023
so why raise rates? ERROR
Blanchflower, now a professor of economics at Dartmouth College in the US, said:
“Over the last two weeks the shenanigans that have gone on in global financial markets is basically equivalent to perhaps [a] two percentage points rise in interest rates. So that’s going to clamp down on the economy hugely.”
“If you look at the Bank’s own forecasts, with what I’ve just said is [a] huge tightening in financial conditions around the world, they should be cutting rates, according to their own forecasts. So this is a big incoherence. And the problem is going to be, the data is going to actually swamp them, and I think what you’re going to see is rapid U-turns.”
“I think what you’ve seen here is a disastrous error. [It] reminds me of 2008.”
Asked by presenter Sarah Montague if he predicted a recession, Blanchflower replied:
“Well I think the probability is that there is going to be [a recession]. “
“We’re going to know pretty soon ... we’re going to start to see activity data getting much worse.”
Prof @D_Blanchflower on #wato
— Alan S. Morrison MBA CIPR Prof PR Cert📢🥰🖋️📸🕸️ (@Alan_S_Morrison) March 23, 2023
firmly predicting new UK financial crisis triggered by interest rate rise today because it's slowing consumer demand https://t.co/1tt6nEi7mB
Says he's right bc he saw 2008 crisis when central bank's didn't.
Calling for rates U-turn.#UKEconomy
Updated
The Monetary Policy Committee voted by a majority of 7-2 to increase #BankRate to 4.25%. https://t.co/3us4oE1pmh pic.twitter.com/uPn7ubt3Pa
— Bank of England (@bankofengland) March 23, 2023
Tim Graf, managing director at State Street Global Markets, reckons the Bank of England is close to stopping its interest rate hiking cycle – probably after one more rise in the coming months.
Graf explains:
“There were few surprises accompanying the Bank of England’s decision to hike interest rates a further 25 basis points. Commentary that wage and inflation pressures were expected to fall sharply over the rest of the year, as well as the fact that there were no further votes for a larger, 50 basis point hike, would suggest that yesterday’s strong CPI data are being looked through and that this rate hike cycle is close to completion.
Markets look well-prepared for this eventuality, with just over one further 25bps hike priced into rate markets.
Nonetheless, time and the next set of inflation data, released on 19 April, will determine if the MPC can say ‘job done’ at the May meeting.”
Deloitte chief economist, Ian Stewart, warns that the UK is facing more economic uncertainty (due to the recent turmoil caused by the failure of three US banks and Credit Suisse).
“The Bank of England has stayed in step with the European Central Bank and the Federal Reserve with today’s interest rate rise.
A stronger economic backdrop, the easing of fiscal policy in the Budget and still high inflation have trumped potential concerns about the banking system as a driver of monetary policy. Yet the turbulence in the financial markets has increased the uncertainty facing the UK.
All eyes are now on the extent to which recent events in the banking sector translate into tighter credit conditions and whether they weigh on growth.”
Rate rise is 'vote of confidence' in wider financial system
By raising interest rates today, the Bank of England has signalled confidence in the banking system after a tumultuous few weeks, says Richard Flax, chief investment officer at European digital wealth manager Moneyfarm.
Flax explains:
The BoE, in a similar vein to the Fed Reserve (last night), the Swiss National Bank (today), and the Norge Bank, has prioritised combating inflation by raising rates for the 11th time in a row with a 25-bps hike to 4.25%.
While this was anticipated considering the BoE’s laser focus at reining in inflation to its 2% target and a higher-than-expected inflation print yesterday, this can also be read as a vote of confidence on the wider financial system being able to navigate the recent banking turmoil.
Despite yesterday’s shock inflation reading, the BoE is confident that inflation should sharply decline over the course of the year. The prediction is based on gas and oil prices seeing material decline, while supply constraints should ease.
As flagged earlier (see 12.10pm) the interest-rate setting MPC was briefed by its counterparts on the Financial Policy Committee, who told them that “the UK banking system remains resilient”.
BOE did as the Fed shocker. Tho I note cynically it's placed the responsibility for anything going Pete Tong on the Fin Policy Cmte assurances that the UK banking sector is resilient. https://t.co/YBobaNYE0P via @opinion
— Marcus Ashworth (@marcusashworth) March 23, 2023
Full story: Bank of England raises UK interest rates by quarter point to 4.25%
The Bank of England has raised interest rates by a quarter of a percentage point to 4.25% in response to higher than expected UK inflation and signs that Britain’s economy is holding up better than feared, our economics correspondent Richard Partington reports from the Bank.
In a fortnight of heightened unease in global financial markets, the Bank’s monetary policy committee (MPC) voted by a majority of seven to two to increase the base rate for the 11th time in a row.
It comes after an unexpected jump in the UK’s annual inflation rate in February to 10.4% from 10.1% in January, fuelled by food prices accelerating at the fastest pace in 45 years. The Bank’s official target for inflation is 2%.
The Bank also said the outlook for the economy is slightly improved and is no longer predicting a technical recession, where the economy shrinks for two consecutive quarters.
Central banks on both sides of the Atlantic have pushed ahead with rate increases despite fears over the collapse of Silicon Valley Bank and the Swiss-government brokered rescue of Credit Suisse by its rival lender UBS. The US Federal Reserve raised its benchmark interest rate on Wednesday by a quarter of a percentage point to a range of 4.75% to 5%.
In a move widely anticipated by City traders after the shock UK inflation increase, the MPC said growth in the British economy was holding up better than expected, as the nine-member rate-setting panel pushed up borrowing costs to the highest level since the 2008 banking crash.
However, it signalled that inflation was still expected to fall “sharply” over the coming months amid a decline in global energy prices, in a potential sign that the MPC’s most aggressive assault on inflation in its history could be near an end.
In a signal of its future plans, the committee said “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”.
More here:
Yesterday’s jump in UK inflation, to 10.4%, meant today’s rate hike was widely expected.
Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, says:
“No one could say the Bank of England’s decision to raise the base rate to 4.25% was unexpected.
The surprise jump in UK inflation to a 45-year high of 10.4% in February, while an 11th hour shock, only reinforced expectations that the BoE would have no choice but to raise interest rates again. It does mean though that the UK’s central bank has now increased interest rates 11 times in a row. And at plus-4% that’s also the highest it has been in more than 14 years.
The Bank of England also had no choice but to acknowledge that inflation is firmly in the driving seat, with concerns over the global banking crisis set aside in favour of tackling a troubling spike in the cost of living.
We all know first-hand how inflation has impacted our daily lives, with the price of everything from salad to mortgage payments going up. So this will undoubtedly be a bitter pill to swallow for struggling households, who were already grappling with higher costs for borrowing and everyday spending.”
Updated
What a difference a month makes. In February, @bankofengland were forecasting prolonged recession. In March, @bankofengland are forecasting no recession. (Detailed forecasts will come in May. Who knows what @bankofengland will be forecasting by then.) https://t.co/lB6duxsdTn pic.twitter.com/imSyrA47p4
— Alistair McQueen (@HelloMcQueen) March 23, 2023
The Bank of England has followed the ECB and the Fed with another round of monetary tightening, points out Victoria Scholar, head of investment at interactive investor.
The MPC has focused on the “elevated inflation backdrop” rather than the potential deflationary fallout from the turmoil in the banking sector, she explains:
The central bank tried to alleviate concerns about the stress across financials, saying it will continues to monitor credit conditions closely, adding that the banking system remains robust, and liquidity is resilient. The Bank of England said the system is well placed to support the economy, including in a period of high interest rates.
In terms of the central bank’s forecasts, it issued a rosier assessment of the UK’s economic outlook, saying its Q2 GDP forecast will ‘increase slightly’ versus its February forecast of -0.4% but its Q1 GDP forecast remains unchanged at -0.1%. It suggested that the latest inflation spike could be temporary, reflecting the volatile nature of clothing prices. It is sticking to its view that CPI should fall over the remainder of 2023.
Sterling bulls are in the driving seat with the pound gathering pace, extending its recent rally to trade up by nearly 0.5% above $1.23. The upswing for cable (the pound/US dollar exchange rate) has been exacerbated by recent weakness for the greenback, under pressure after the Fed carried out a dovish hike on Wednesday. Meanwhile the FTSE 100 remains in the red, underperforming wider European equities as the cost of borrowing in the UK becomes more expensive yet again.
For the estimated 1.6 million households on variable and tracker mortgage deals, this means more expensive monthly repayments, squeezing household budgets and in turn potentially dampening consumer spending. While higher interest rates are a boon for savers, with inflation stuck in double digits above 10%, real term savings rates unfortunately remain in negative territory.
Professor Costas Milas, of University of Liverpool’s Management School, fears the Bank may have to reverse today’s rate hike soon.
Professof Milas tells us there are two reasons why borrowing costs may soon be cut:
Reason 1: Recent movements in the Global Supply Chain Pressure Index, which predicts UK inflation movements quite well, indicate that inflation pressures will recede, and fast, anyway!
Reason 2: The growth of divisia M4 money in the economy, a key measure of liquidity, turned negative in early 2023. The last time we witnessed that was during the 2008 financial crisis. The Bank’s decision to raise interest rates further today will push money growth into further negative territory and hit UK growth.
Can we afford that when questions about the fragility of the banking sector remain unanswered? The MPC was briefed by the FPC that the UK financial system remains resilient. But we already knew that based on the most recent “stress tests”.
“Stress tests” suggested that our financial system is resilient to a 45% drop in equity prices, a 5% recession and an increase in UK interest rates to 5.1%. These are reassuring tests but do not forget they are only run on paper!
The money markets are pricing in another rise in UK interest rates in future meetings, with Bank Rate seen at 4.5% by this summer.
Another quarter-point rate hike in May is seen as a 53% chance.
Updated
Today’s hike in UK interest rates will be “a source of huge concern for families”, says Rachel Reeves MP, Labour’s shadow chancellor.
Reeves says:
“Today’s interest rate announcement will be a source of huge concern for families across the country who will be thinking about the impact this will have on their finances.
The government think the cost of living crisis is over but the reality is that too many families are dealing with a Tory mortgage penalty and battling with soaring food prices.
That’s why their choice to give the top 1% of pension savers a £1 billion tax cut while working people’s taxes go up is so unjustified.
Labour will bring the sound economic management urgently needed to stabilise the economy. Our mission to have the highest sustained growth in the G7 will get us back on track again.”
That ‘Tory mortgage penalty’ has eased since the market mayhem after the mini-budget last September.
Fixed-term mortgage rates have dropped to a six-month low, figures from Moneyfacts showed this week. The average cost of a two-year deal fell to 5.32% this month, having jumped over 6.5% after the mini-budget.
Jeremy Hunt welcomes interest rate hike
Chancellor Jeremy Hunt has welcomed the Bank of England’s decision, saying it will help get a ‘grip’ on rising prices:
“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 £3300 per household over this year and next.”
UK interest rate rise: what it means for you
Here’s an explanation about what today’s interest rate rise will mean for your finances:
Today’s hike in borrowing costs is a blow to borrowers, and will push up the cost of variable-rate mortgages.
Brian Murphy, head of lending at Mortgage Advice Bureau, says:
“Today’s interest rate rise will be another bitter pill to swallow. It will feel like a double whammy of bad news for those on variable rate deals, after the cost-of-living showed no signs of slowing down last month. As for the roughly 400,000, fixed deals due to expire in Q2, there is some good news. Despite today’s rise, the rates on two and five-year fixes continue to fall and have reached a six-month low.
“There is also some light at the end of the tunnel for those on variable rates. It looks like we’re fast approaching the summit of the interest rate hikes, and there are hopes that the cost of borrowing will start to decrease.”
Here’s property agent Emma Fildes of Brick Weaver:
The Bank of England raised rates by 0.25% to 4.25% today in an attempt to soothe inflation after it flared back up to 10.4% yesterday. This treatment may prove costly to bank stability & to many looking to secure a mortgage https://t.co/EvogPlg5ul
— Emma Fildes (@emmafildes) March 23, 2023
Here’s the BBC’s Faisal Islam on the Bank’s decision:
NEW
— Faisal Islam (@faisalislam) March 23, 2023
Bank of England raises UK base rates to 4.25%, highest in 14 years.
Bank reiterates suggestion that further rises only “if evidence” of further inflationary pressure, minutes play that down.
No technical recession now forecast, broadly flat, as growth boosted by budget.
Bank also predicts inflation to fall even more sharply despite yesterdays shock number.
— Faisal Islam (@faisalislam) March 23, 2023
7-2 vote for rate rise.
Will consider everything in May with new forecast.
Looks to me that we might be pausing then.
The “additional fiscal support” announced by Jeremy Hunt in the Spring Budget could lift UK GDP by 0.3% compared to February’s forecasts, the MPC says.
But, the Bank of England will conduct a full assessment, including the extent to which these measures could affect supply as well as demand in the medium term, ahead of its May Monetary Policy Report (when it updates its economic forecasts).
NEW
— Ed Conway (@EdConwaySky) March 23, 2023
- @Bankofengland raises interest rates by a further 0.25 percentage points to 4.25%
- 11th successive increase. Rates now at highest level since 2008.
- However BoE also reveals it no longer expects the UK to face a technical recession this year.
More on @skynews soon…
Why the Bank of England raised interest rates again
The Bank of England voted to raise interest rates today despite believing that inflation will drop sharply in the next few months.
CPI inflation is still expected to “fall significantly” in 2023 Q2, to a lower rate than anticipated in the February Report, it says, partly due to the freeze on household energy bills.
The minutes of this week’s meeting say:
This lower-than-expected rate is largely due to the near-term news in the Budget including on the EPG, 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 the February Report.
The economy has been subject to a sequence of “very large and overlapping shocks”, the Bank points out, and it will use monetary policy to anchor longer-term inflation expectations at its 2% target.
The minutes say:
The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.25%, at this meeting. 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 Bank of England has also lifted its forecast for UK growth in the first half of this year.
It points out that Jeremy Hunt’s Budget Day decision to freeze the energy price guarantee until the end of June (meaning a typical household pays £2,500 per year, rather than £3,000) will support household incomes.
The minutes of today’s meeting say:
GDP is still likely to have been broadly flat around the turn of the year, but is now expected to increase slightly in the second quarter, compared with the 0.4% decline anticipated in the February Report.
As the Government’s Energy Price Guarantee (EPG) will be maintained at £2,500 for three further months from April, real household disposable income could remain broadly flat in the near term, rather than falling significantly. The labour market has remained tight, while the news since the MPC’s previous meeting points to stronger-than-expected employment growth in 2023 Q2 and a flat rather than rising unemployment rate.
The Bank of England has raised its forecast for global growth, despite the recent turmoil in the banking sector.
The minutes of this week’s meeting say:
Global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained elevated.
Wholesale gas futures and oil prices have fallen materially.
There have been large and volatile moves in global financial markets, in particular since the failure of Silicon Valley Bank and in the run-up to UBS’s purchase of Credit Suisse, and reflecting market concerns about the possible broader impact of these events.
The Bank says the Monetary Policy Committee (who set interest rates) have been briefed by its Financial Policy Committee about recent global banking sector developments.
The FPC judges 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 FPC’s assessment is that the UK banking system remains resilient.
Bank split 7-2 on rate decision
Today’s decision was not unanimous, with the nine members of the Monetary Policy Committee split 7-2 over where to set interest rates.
Seven members (governor Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill and Dave Ramsden) voted in favour of raising Bank Rate by a quarter-point, to 4.25%.
But two members, Swati Dhingra and Silvana Tenreyro, voted against the proposition, preferring to maintain Bank Rate at 4%. They are the two most dovish members of the committee.
Dhingra and Tenreyro argued that as the effects of the energy price shock and other cost-push shocks unwound, headline CPI inflation should fall sharply over 2023.
Tht would reduce the “associated persistence in domestic price setting”.
At the same time, the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through, they argued.
Bank of England interest rate decision
Newsflash: The Bank of England has lifted UK interest rate to a near 15-year high.
The BoE’s Monetary Policy Committee has voted to raise Bank Rate to 4.25%, from 4%.
This is the 11th increase in UK interest rates in a row, as the Bank battles inflation - which rose to 10.4% in February, dashing hopes that prices pressures were easing.
It lifts UK interest rates to their highest since October 2008, early in the financial crisis, when Bank Rate was 4.5%.
Tension is rising in the City, with less than 15 minutes to go until the Bank of England reveals its decision on UK interest rates.
The money markets currently indicate that a quarter-point increase in Bank Rate, to 4.25%, is a 95% probability, with only a small possibility of ‘no change’.
But the Monetary Policy Committee could surprise us, as they did in November 2021 when they left interest rates on hold.
Bank of England #BoE rate announcement due at the top of the hour, traders!#STIR markets have all but priced in a #25bp hike, which would bring the Official Cash Rate to 4.25% #FPMarkets pic.twitter.com/DbdzgBrGNB
— FP Markets (@FP_markets) March 23, 2023
Updated
Blog reader Charlie Lloyd has got in touch to warn that whatever the outcome of today’s BOE meeting, the trajectory of inflation is clear.
Charlie explains:
Monetary policy acts with long and variable lags and central banks are simply shooting in the dark at this point. Global credit conditions are set to tighten significantly in light of recent events, and commodity prices have fallen sharply.
Headline inflation, much like unemployment data, is a lagging indicator, and most forward looking indicators suggest inflation is set to fall considerably in the coming quarters. This has been corroborated by bond markets.
Central banks were too slow to tighten policy, and will inevitably over-tighten, as per previous rate hiking cycles. When the US data starts to turn, bond yields will fall very quickly (in my view!).
Kevin Barry QS is struck by Danny Blanchflower’s call for interest rates to be cut (see 9.30am post), saying:
If Blanchflower predicted 2008 crash and sees correlations now, interest rate rises today are setting the scene for 2023 crash! Depositors will panic and move to safe havens, under the bed...
Kevin G asks an excellent question – why does the Bank of England think raising interest rates will bring down inflation, given that rising prices have been driven by energy costs and food?
To my understanding, this inflation is being caused by the high cost of gas and energy, the rising cost of food which is set by the supplier, basically things that are out of control of the regular people.
How is raising the interest rate going to cause the decrease in the things that are out of the control of the UK population?
We’ll find out the Bank’s thinking at noon – when it releases the minutes of this week’s meeting. Last month, though, the MPC pointed out that inflation expectations remained “elevated” – the theory is that hiking borrowing costs will persuade people that inflation will fall, making them less likely to push for inflation-matching pay rises.
The flaw in this logic is that inflation is a measure of price rises, not wage increases, and companies have been successfully raising their prices, leading to worries about ‘greedflation’:
Updated
Message us your views
We’re testing a new feature in the blog today, which lets readers send through messages to us here at the Guardian.
They’re not public comments – we are the only ones who will see your message, but I will monitor them and try to respond in the liveblog.
So you can let us know your views on today’s Bank of England interest rate decision, the cost of living crisis, the turmoil in the banking sector, or other business events in the news…
To try it, click the ‘Send us a message’ under my byline near the top of this blog. Thanks!
Updated
Small signs of positive improvement in UK business conditions
There are “small signs” of improvement in the UK economy, the Office for National Statistics reports this morning.
Its latest realtime data, assessing business conditions, shows “small signs of positive improvement for some measures”.
That would cheer the Bank of England, as it tries to cool inflation without sinking the economy.
The ONS warns, though, that its too early to know if this is the start of a longer-term change in conditions.
There’s been a fall in the number of businesses reporting lower turnover, and fewer companies say they have to pay more for their goods and services.
The ONS says:
In February 2023, a quarter (25%) of trading businesses reported their turnover was lower compared with January 2023, while 16% reported their turnover was higher; therefore, a net 9% of businesses reported their turnover decreased, this is up from a negative net position of 13% in January 2023.
More than one in five (22%) trading businesses expect turnover to increase in April 2023, while 12% of businesses expect turnover to decrease; the net 9% of businesses expecting turnover to increase is the highest net position since the question was first asked in April 2022.
More than a third (37%) of trading businesses reported an increase in the prices of goods or services bought in February 2023 compared with January 2023; this proportion has been falling since the first time the question was asked in March 2022 (50%).
62% of trading businesses said they had been affected in some way by price rises. The most reported effects were
— Office for National Statistics (ONS) (@ONS) March 23, 2023
▪️ absorbing costs (41%)
▪️ passing on price increases to customers (27%)
▪️ changing suppliers (12%)
➡️ https://t.co/VOwRHWEdN7
Bloomberg: breakfast price index reaches new high after UK food shortages
An index of breakfast ingredients has hit a new high, as food shortages drove up prices in the UK shops.
Bloomberg reports that the average cost of products to make a traditional fry-up rose by more than 22% from a year earlier in February.
It was the second straight month that the Breakfast Index increased by more than 20%, based on yesterday’s UK inflation report.
Bloomberg explains:
The price of a basket of English breakfast items soared past £35 as vegetable shortages in supermarkets fueled a surprise jump in UK inflation.
Tomato prices rose 6.4% in February compared with the previous month, the second-biggest riser in the latest Bloomberg Breakfast Index behind bread.
A supply crisis caused grocers such as Tesco and J Sainsbury to restrict sales of certain produce to three per person last month, while pictures on social media showed empty shelves across the country.
More here.
Breakfast Index reaches new high after UK food shortages https://t.co/EMPmrzyemr via @irinaanghel12 pic.twitter.com/KLGbW2o60W
— Zoe Schneeweiss (@ZSchneeweiss) March 23, 2023
Updated
The UK stock market has dropped into the red this morning, ahead of the Bank of England’s decision on interest rates at noon.
The FTSE 100 index of blue-chip shares has shed 66 points, or 0.85%, to 7,501, away from yesterday’s one-week high.
The stronger pound is weighing on exporters’ share prices.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says the Bank of England decision is in focus after last night’s Federal Reserve rate hikes, with banking nerves still on edge.
With the banking sector not out of the woods and central bank and US treasury officials still on edge, uneasy about what may lie ahead, a sense of nervousness is still hanging over the markets. The FTSE 100 has opened in negative territory, following in Wall Street’s footsteps, with the S&P 500 closing sharply lower, as the Federal Reserve raised rates but signalled a pause was on the horizon given recent turmoil.
Because contagion has been contained, and inflation is still far too high, the Federal Reserve stuck to its plan and lifted rates by 0.25%.
Achieving price stability is still the top priority, given the pain high prices have been causing right through the economy.
Updated
Germany risks running out of gas next winter, warns regulator
Europe’s energy woes may drag on into next winter, according to Germany’s energy watchdog, our energy correspondent Jillian Ambrose writes.
Klaus Müller, the head of the Federal Network Agency, told the Financial Times that the “danger of a gas shortage is still there”, and warned that households and businesses will need to cut gas use further to avoid an energy crunch next winter.
Germany is a key gas trading hub within Europe, and in the past has acted as a conduit for gas imports from Russia to the rest of the continent through a network of gas pipelines.
Another winter of tight gas supplies and higher prices in the German gas market would likely lead to higher prices across Europe too.
The coming winter will be a key test for Germany, according to Müller, because it will be its first winter without any Russian pipeline gas imports. China’s economic recovery could stoke demand for gas on international markets leading to higher global prices too.
One former Bank of England policymaker argues that the BoE should slash interest rates at this week’s meeting, not hike.
David Blanchflower, a member of the Bank’s monetary policy committee during the global financial crisis of 2008, argues that UK official borrowing costs should be cut from 4% to 3% at this week’s meeting.
Blanchflower is also pushing for the Bank to stop its quantitative tightening (QT) programme, under which it is selling government bonds it bought since the 2008 financial crisis (under its quantitative easing, or QE, ringing).
Blanchflower, who pushed for interest rates to be cut ahead of the 2008 financial crisis. says:
“The Bank of England is showing signs of dangerous groupthink when it comes to QT, believing that it must reverse the previous policy of QE when they have not as yet offered any credible reason for doing so.”
So mpc members have ben raising rates to help banks but instead they destroyed them. Brilliant all in the name of slowing inflation but they failed at that too. Groupthink seems a bit of a problem what?
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) March 20, 2023
Blanchflower, who has co-written a report on central bank policy with economist Richard Murphy, added:
The Bank of England needs to stand back and reappraise its role on the economy. It could use QE over the next few years to be a powerful force for good for the people of the UK, transforming the mortgage, student loan and business investment markets, in the process using new funds created via QE.
We urge them to grab this opportunity instead of heading us towards almost inevitable recession or even depression, so severe could the impact of QT be.
@D_Blanchflower and I have issued a press release on how we see the banking crisis developing. We think there is a very real contagion risk that central banks need to respond to very urgently with rate cuts over the next few days. The release is in the rest of this thread. pic.twitter.com/94rzM2annR
— Richard Murphy (@RichardJMurphy) March 20, 2023
However, a former BoE deputy governor, Sir Charlie Bean, predicts that the Monetary Policy Committee will lift Bank rate at noon today.
He told Radio 4’s Today Programme that Bank staff will be trying to unpick how much of the factors pushing up inflation are temporary and will unwind, and how much is permanent.
Bean doesn’t accept Blanchflower’s argument for a rate cut, though, saying:
Danny puts a pretty low weight on keeping inflation down, basically, and tends to take the view that we’re heading for disaster all the time.
Sometime’s you’re right. A stopped clock is right twice a day.
Charlie Bean says of @D_Blanchflower “a stopped clock is right twice a day” on #r4 @BBCr4today@bankofengland #InterestRate
— Gareth Davies (@GarethDavies007) March 23, 2023
Of course, Blanchflower’s warnings of a looming recession 15 years ago were proved to be accurate, after he spent months voting, alone, for rate cuts. Then came the collapse of Lehman Brothers, and the rest of the MPC joined him….
Updated
We have another interest rate rise – this time in Norway.
The Norges Bank’s Monetary Policy and Financial Stability Committee has decided to raise the Norwegian policy rate from 2.75% to 3%, as it battles inflation.
That matches the European Central Bank’s deposit rate, which was raised to 3% last week.
Growth in the Norwegian economy is slowing, but economic activity remains high, the labour market is tight, and wage growth is on the rise, the Norges Bank says.
Its governor, Ida Wolden Bache, flagged that another rate increase could come in May:
There is considerable uncertainty about future economic developments, but if developments turn out as we now expect, the policy rate will be raised further in May.
Updated
The Bank of England is almost certain to raise interest rates by 0.25 percentage points at noon today, predicts Professor Costas Milas, of the Management School of University of Liverpool.
He points out that both the ECB and the Fed have hiked their policy rates already this month, with inflation in the US and the Eurozone being lower than the 10.4% inflation reading in the UK.
However, monetary policy should be forward looking rather than dependent on current inflation. I still believe that the “wait and see approach” is better than hiking now since inflation will fall rapidly.
Prof Milas has written a detailed discussion of the impact of raising interest rates during elevated financial stress (which is arguably the case today) here, in a blog on the LSE Business Review.
In it, he points out that rising financial stress will put downward pressure on prices and suppress GDP growth…… at a time when money growth in the UK economy has turned negative for the first time since the 2008 financial crisis.
Updated
Switzerland lifts interest rates to 1.5%
Switzerland’s central bank has hiked interest rates by half a percentage point (updated).
The Swiss National Bank’s policy rate has been lifted to 1.5%, from 1%, to counter “the renewed increase in inflationary pressure”.
The SNB says it cannot rule additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.
The past week has been marked by the events surrounding Credit Suisse, the SNB acknowledges, adding:
The measures announced at the weekend by the federal government, FINMA and the SNB have put a halt to the crisis.
The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies. These loans are backed by collateral and subject to interest.
SNB:
— DailyFX Team Live (@DailyFXTeam) March 23, 2023
-We cannot rule out additional rate increases in the near future
- sees 2023 Swiss growth at around 1% vs the December forecast for growth around 0.5%
-sees 2023 inflation at 2.6% (previous forecast was for 2.4%)
Updated
In the City, shares in sub-prime lender Amigo have plunged by 90% to almost zero after it revaled this morning that efforts to restructure its business have failed.
Amigo told shareholders this morning that it has struggled to raise new equity from investors. It has taken the ‘very difficult decision’ to stop lending with immediate effect and wind down its lending operation.
Danny Malone, Amigo’s chief executive officer, said.
“This is a very sad day for all our employees who have worked extremely hard to address historic lending issues and rebuild a new Amigo, and for our shareholders and wider stakeholders who have supported us.
It’s also a sad day for creditors due redress who will now receive a lower level of cash compensation than they would had the New Business Conditions been satisfied.
Amigo specialises in providing credit to borrowers typically excluded by mainstream banks.
Back in 2021, the company set aside £344m for customers who complained they were mis-sold loans that they could not afford, and launched its rescue plan to raise cash from investors – part of which could be used to pay off wronged customers.
An investigation from the City regulator found that Amigo had failed to assess properly whether customers, or their guarantors, could afford to repay loans they applied for. The company avoided a fine, though, arguing that this would have led to its collapse
Citigroup have downgraded Europe’s banking sector, warning the rapid pace of interest rate hikes will further weigh on economic activity and lenders’ profits.
The Wall Street brokerage cut its rating on European banks to “neutral” from overweight” in a note on Wednesday, saying the likely continued monetary policy tightening adds to worries stemming from the turmoil in the global banking sector.
The note says:
“The European banking sector’s fundamentals look healthy. But the ongoing confidence crisis could limit banks’ risk appetite and reduce the flow of credit.”
They, instead, prefer technology stocks.
Pound highest since early February
Sterling has touched its highest level since the start of February this morning, as the City anticipates another rise in UK interest rates at noon.
The pound reached $1.2343, up three-quarters of a cent, as the dollar slipped following last night’s Federal Reserve decision.
Where do we go from here? 🇺🇸
— IG (@IGcom) March 22, 2023
Here is how the US Dollar Basket reacted LIVE to the Fed's ninth rate hike in a row pic.twitter.com/wbryqouChh
Although the Fed did lift US interest rates by a quarter-point, it also dropped its regular warnning that “ongoing increases” in Fed Funds rate would be needed.
“In other words, the Fed has toned down its statement to give it flexibility to pause the interest rate hiking cycle in May depending on incoming economic data,” says Matthew Weller, global head of research at FOREX.com and City Index.
Britain’s biggest banks under pressure to pass on higher interest rates to savers
Britain’s biggest banks are under pressure to pass on higher interest rates to savers after figures showing they have made an extra £7bn by refusing to do so, my colleague Richard Partington writes.
On the day the Bank of England is expected to announce a further rise in interest rates, the Unite trade union said banks had already made billions of pounds in extra profit from the dramatic rise in borrowing costs.
Banks make money by charging higher interest on loans than deposits, using the central bank base rate as the reference point. However, the industry has come under fire from across the political spectrum for passing on the rise to borrowers amid the cost of living crisis at a faster rate than for savers.
Stepping up the pressure on the banking industry on Wednesday, the powerful Treasury committee of MPs said it was writing to the City watchdog, the Financial Conduct Authority, to suggest it should look at the issue.
Harriett Baldwin, the Conservative chair of the committee, said:
“While consumers should continue to shop around for the best rates, the information we’ve received from the UK’s biggest high street banks demonstrates there is much more that can be done.”
Barclays, HSBC, Lloyds Banking Group and NatWest Group were forced last month to defend rates of less than 1.3% on their easy-access savings accounts, despite the Bank of England base rate rising to 4%.
More here:
Updated
The Bank of England is caught between the threat of prolonged high inflation and the risk of “a continued slump in economic growth and/or a potential financial accident,” says Oliver Blackbourn, portfolio manager on the Multi-Asset team at Janus Henderson Investors.
Blackbourn adds:
Markets have been roiled recently by this final fear, with banks being wound up or merged in both the US and Europe.
The Bank of England will hope that it can avoid such a situation in the UK, but it needs to weigh this risk against the cost to the population of potentially prolonging the squeeze in the cost of living. The Bank needs to tread a very narrow path as increased borrowing costs really start to bite but inflation remains well above the 2% target rate. Its latest projections put inflation at 3.9% at the end of 2023 but 1.0% in the middle of 2024.
Being able to look through the current high level of inflation can only be deemed an appropriate reason not to raise interest rates significantly further if inflation can demonstrably be seen to be moderating. Today’s data will bring that into question.
Introduction: Bank of England setting interest rate today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
With inflation worryingly high, and the banking system in turmoil, these are difficult times for central bankers.
And today, the Bank of England will reveal whether it had pushed up UK borrowing costs again, or left interest rates on hold at 4%.
Yesterday’s shock rise in UK inflation, to 10.4%, has left many investors expecting the BoE’s Monetary Policy Committee to lift Bank Rate by a quarter of one percent today, to 4.25%.
That would be the 11th interest rate increase in a row, extending a tightening cycle which began in December 2021.
But Bank policymakers may be wary of pushing interest rate higher, as the problems in the banking sector this month have shown that the impact of last year’s interest rate increases are being felt now.
The BoE could plum for a ‘dovish hike’ – lifting borrowing costs, while signalling that rates could be near their peak. But that would be more palatable if inflation wasn’t in double-digit levels.
Ellie Henderson, economist at Investec, explains:
When deciding the appropriate level of the Bank rate the MPC will have to assess which is the lesser of two evils: the risk of inflation being higher for longer or the current threat to financial stability stemming from the rapidly evolving fears of a banking crisis.
In an environment where inflation is reaccelerating, the question is whether the MPC will continue to raise interest rates or opt for a wait-and-see approach given the events that have unfolded over the past week or so.
Last night the US Federal Reserve lifted its key rate by a quarter-point, as America’s central bankers weighed up the worst banking crisis since 2008 and the highest inflation rate in a generation.
But, the Fed also indicated it was on the verge of pausing further increases in borrowing costs amid the recent turmoil in financial markets, although it does not expect to cut rates anytime soon.
Edward Park, chief investment officer at Brooks Macdonald, says setting monetary policy against a backdrop of market volatility and inflation uncertainty is “an unenviable task”.
There are two camps in the market - those who view the current risks to financial stability as an existential problem and those who consider sustained inflation as a greater evil. Fed Chair Powell had previously stated that the Fed was ‘prepared to increase the pace of rate hikes’ to tackle stickier inflation seen in the recent CPI release.
“The 25bp interest rate hike announced represents a middle ground between the hawkish and dovish camps. It acknowledges the stickiness of US inflation while being mindful of the macroeconomic risks posed by the banking sector. The equity markets initially reacted positively to the announcement, as it struck a balance between addressing investor concerns around banking contagion and indicating that the central bank is taking inflation levels seriously.
We also get interest rate decisions in Switzerland – where policymakers have been busy battling the banking crisis – and Norway.
The agenda
8.30am GMT: Swiss National Bank interest rate decision
9am GMT: Norges Bank interest rate decision
9.30am GMT: Realtime UK economic and business insight data
Noon: Bank of England interest rate decision
12.30pm GMT: US weekly jobless claims
3pm GMT: Eurozone flash reading of consumer confidence
Updated
