The Bank of England has raised interest rates to 4.5% from 4.25%.
Seven members of the Bank of England’s Monetary Policy Committee (MPC) voted to hike the base interest rate from 4.25% to 4.5%.
They said there had been “repeated surprises about the resilience of demand” and that inflation had been stronger than expected as the price of food and other goods were higher.
The remaining two members of the MPC wanted to keep rates unchanged, saying that inflation was already expected to fall considerably this year without the need to rise the rate again.
They also said a lot of the impact of rising rates has not yet come through into the economy. The Bank estimates that around a third of the impact of rates increases has been passed through.
The increase in the cost of living is expected to fall slower than previously thought, the Bank of England has warned, but the Government’s promise to halve inflation by the end of the year is still narrowly on track.
The Bank said it expects Consumer Prices Index (CPI) inflation to reach just over 5.1% by the final quarter of this year, which would mean that the Government only just manages to hit the target to bring inflation below 5.35%.
It comes as the monthly increase in food prices has reduced slower than previously expected.
Meanwhile, economists at the Bank released a record upgrade to its gross domestic product (GDP) expectations.
The Bank said it now expects GDP to be 2.25 percentage points higher at the end of its three-year forecast period than it said in February. That is the largest upgrade since 1997 when the Monetary Policy Committee (MPC) was formed.
In a report, the Bank of England’s Monetary Policy Committee (MPC) said: “In the modal forecast conditioned on market interest rates, and taking account of stronger paths for food prices and demand growth, CPI inflation is expected to decline somewhat less rapidly compared with the February report.”
Speaking about the troubles that have hit banks in recent months, it added: “Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments.”
The Bank said it expects the banking crisis will reduce US GDP by around 0.25 percentage points, but will have a much smaller impact in Europe.
It added: “The committee judges that growth over much of the forecast period will be materially stronger than in the February report.
“This reflects stronger global growth, lower energy prices, the fiscal support in the spring Budget and the possibility of lower precautionary saving by households than previously thought.”
