The Bank of England raised interest rates by 25 basis points to 4.25% Thursday, as widely anticipated by the market, in a 7-2 vote.
Further tightening of monetary policy will be required “if there were signs of more persistent price pressures,” the central bank said in a statement.
The Bank of England said it expects inflation to decline sharply in the second quarter, owing to the government’s Energy Price Guarantee caps on utility prices and lower wholesale energy costs. Inflation in the services CPI is likely to stay broadly steady in the near term, the central bank said. Nonetheless, wage growth is anticipated to slow faster than predicted in the February report.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” said Andrew Bailey, Governor of the Bank of England in the wake of the rise of interest rates.
U.K. GDP is still forecast to remain basically flat at the turn of the year, but it is now expected to rise modestly in the second quarter compared to the 0.4% fall predicted in the February Report. The fiscal support in the March budget will raise GDP by roughly 0.3% over the following years, the Bank of England said.
The Bank of England said that it will “pay special attention to U.K. credit conditions,” but it also stated the U.K. banking sector “maintains solid capital and liquidity” and is “well-placed to sustain the economy, especially during periods of higher interest rates.”
“With rising prices strangling growth and eroding family budgets, the sooner we grip inflation, the better for everyone,” said Jeremy Hunt, Chancellor of the Exchequer for the UK.
“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.”
Following the BoE decision, the British pound continued to tick 0.3% higher against the U.S. dollar, extending the prior session’s gains.
GBP/USD, which is tracked by the Invesco CurrencyShares British Pound Sterling ETF, broke above the 1.23 mark, approaching February’s highs.
The major U.K. stock market index, the FTSE 100 index, which is tracked by the iShares MSCI United Kingdom ETF, was broadly unchanged.
U.K. Gilt yields held also flat: the two-year yield traded at 3.4%, and the 10-year benchmark at 3.43%.
The S&P 500 E-mini futures held at 3,988 points ahead of Thursday’s U.S. market open.
“The stakes could not have been higher for Thursday’s interest rate decision in light of the banking crisis and hot inflation,” said Giles Coghlan, chief market analyst at HYCM.
“If it were not for yesterday’s surprise CPI reading, the Bank of England’s decision to hike rates today would have been finely balanced – even in the wake of the SVB-Credit Suisse crises, there was a clear argument for holding rates at 4%,” he said.
“However, with inflation proving stickier than expected in the U.K., keeping the hammer down on spiralling prices remains the priority and today’s 25bps hike should help to cement disinflationary forces.”
Produced in association with Benzinga
