The Bank of England has pulled the trigger on another interest rate rise but its signalling will do little to assuage critics who think that it is dangerously behind the curve on taming inflation.
An increase of 25 basis points to the main Bank rate is a return to the pre-pandemic interest rate of 0.75 per cent. The decision to raise rates was near unanimous, with eight in favour and one member of the monetary policy committee voting to keep rates unchanged. No MPC members were in favour of a rise greater than 0.25 percentage points.
The Russian war in Ukraine and the yet-to-be-realised economic fallout looms large over the Bank’s policymakers.
The outlook for the global economy has deteriorated significantly since the Bank’s February rate rise with Russian tanks rolling into Ukraine weeks later. Food and energy prices are on the up, supply chains are continuing to be squeezed and the war is weighing down business sentiment.
Projected UK inflation is now expected to hit four times the BoE’s target rate at 8 per cent in April, up from the peak of 7.25 per cent estimated last month. Prices will remain elevated for most of the year and could climb “several percentage points” further raising the spectre of double-digit inflation when Ofgem introduces its new price cap in October.
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In the trade-off between growth and inflation, the Bank is choosing to veer on the side of caution, given the uncertainty around events Ukraine. It softened its language around future rate hikes this year, saying that “further modest tightening in monetary policy might be appropriate in the coming months”: a shift from the “likely” tightening suggested in February.
It is a far cry from the stance taken by the US Federal Reserve, which starting the firing gun on an aggressive tightening cycle on Wednesday that could result in further seven rate hikes this year. Even the European Central Bank delivered a surprisingly hawkish message earlier this month, opening the door to exiting its mass bond-buying programme later this year.
The Bank of England is opting to keep its powder dry just before Rishi Sunak’s spring statement, passing the baton to the government to address the record squeeze in living costs. “This is something monetary policy is unable to prevent,” it warned.