UK central bank lifts interest rates to 4.25% despite banking turmoil

London: The Bank of England has raised interest rates by a quarter-point to 4.25 per cent to combat double-digit inflation, the 11th successive hike in less than 18 months.

The decision followed both the European Central Bank and US Federal Reserve’s move to increase their benchmark rates in the past week, despite turmoil in the banking sector, which was partly triggered by tighter monetary policy.

The Bank of England has raised UK interest rates.Credit: AP

It lifts UK interest rates to their highest since October 2008, early in the financial crisis, when the bank rate was 4.5 per cent. It also comes after inflation took a surprise leap to 10.4 per cent in February. Inflation hit a 41-year high at 11.1 per cent in October.

Governor Andrew Bailey kept his cards close to his chest when asked about future rate rises, saying they would depend on the emerging evidence, and that the financial and economic outlook had become more uncertain.

“We don’t know whether it’s going to be the peak,” he told broadcasters.

“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.”

Earlier this week investors were split on whether the bank would leave the rate unchanged after the rescue of Credit Suisse and the collapse of Silicon Valley Bank. The bank noted “large and volatile moves” in global financial markets but said its Financial Policy Committee judged that Britain’s banking system was “resilient” and “well-placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates”.

Seven of the BoE’s Monetary Policy Committee’s nine members voted for the rate increase, arguing that the country’s stronger outlook for gross domestic product and employment could “reinforce the persistence of higher costs in consumer prices”.

The European Central Bank last week stuck to its plans and raised rates by 50 basis points despite the turmoil, a move repeated by the Swiss National Bank. On Wednesday, the US Federal Reserve raised its main interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases.

The UK central bank’s announcement said that consumer price inflation was “still expected to fall significantly” in the second quarter of this year “to a lower rate than anticipated” last month, largely because of declines in energy prices and the Sunak government’s decision to maintain a support scheme that will reduce household energy bills for a further three months.

February’s unexpected rise in inflation was partly due to higher clothing and footwear prices that “tend to be volatile and could therefore prove less persistent”, the bank said.

The bank also reflected government modelling released with last week’s budget which suggest the UK was no longer expecting a technical recession this year, adding that GDP “was now expected to increase slightly in the second quarter”. By contrast, a month ago, it expected a 0.4 per cent decline.

“GDP is still likely to have been broadly flat around the turn of the year,” it added.

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