As predicted, the Bank of England has raised its interest rates to 4.25pc, with a 25 basis point increase. The hike was approved by a majority of 7-2 in the Monetary Policy Committee’s vote.
With the aim of combatting inflation, the Bank of England has raised UK interest rates for the 11th consecutive time. Unfortunately, this move comes as a disappointment, as inflation surged to 10.4% in February, dashing hopes of any easing in price pressures. This hike brings UK interest rates to their highest point since the onset of the financial crisis in October 2008, when the Bank Rate was at 4.5%.
As household basic items like food and drink continue to become more expensive, the decision to raise interest rates will also result in increased mortgage costs for homeowners with tracker deals.
Policymakers are aiming to reduce inflation, which had been predicted to decrease to around 9.9pc but instead rose unexpectedly to 10.4pc last month. The implementation of fruit and vegetable rationing at supermarkets has contributed to the highest food price rate increase in 45 years.
Similar to other central banks across the world, the latest increase in UK interest rates is in line with this trend. The US Federal Reserve also chose to increase interest rates by 25 basis points to a range of 4.75pc and 5pc last Wednesday. Additionally, last week, the European Central Bank raised rates by half a percentage point despite the banking crisis that arose from the collapse of Silicon Valley Bank, which has affected the global market.
In its latest monetary policy report, the Bank of England has stated that global growth is expected to be stronger than previously projected and that the UK banking system continues to be robust. The report acknowledges that core consumer price inflation in advanced economies has remained high, but notes that wholesale gas futures and oil prices have decreased substantially.
The Bank of England also recognizes the large and volatile fluctuations in global financial markets, especially since the failure of Silicon Valley Bank and the run-up to UBS’s acquisition of Credit Suisse, causing concerns about the broader impact of these events. Despite this, government bond yields have not changed significantly, and risky asset prices are somewhat lower than at the Committee’s previous meeting.
The Bank of England’s Financial Policy Committee has provided an update to the Monetary Policy Committee regarding recent developments in the global banking sector. The FPC has determined that the UK banking system has maintained strong capital and liquidity positions and is well-prepared to support the economy across a range of economic scenarios, even in a period of higher interest rates. Therefore, the FPC assesses that the UK banking system remains resilient.
