Following Wednesday’s unexpected increase in inflation, the Bank of England declared that interest rates had increased for the eleventh time in the previous two years.
The Monetary Policy Committee (MPC) of the Bank voted seven to two to raise rates from 4% to 4.25%.
In contrast to the 0.4% GDP decline that the Bank had predicted last month, they said they now expect the economy to increase somewhat in the second quarter of the year.
Furthermore, inflation is set to come back down this year despite a surprise increase in Consumer Prices Index (CPI) inflation last month, to 10.4% from 10.1% in January, driven by surging food and drink prices.
The decision marks the 11th time in a row the Bank has hiked interest rates.
It comes after inflation hit a 41-year high at 11.1% in October last year.
The BoE faced a difficult balancing act, weighing up the need to rein in inflation with the worries over banking woes and the possibility they may start to clamp down on lending.
Yesterday’s data – showing inflation rising to 10.4% in February rather than continuing its descent – immediately turned today’s announcement into an almost one-way bet on a quarter-percentage-point increase in Bank Rate.
Last month the raise in interest rates meant it was the highest in 14 years.
A spokesperson from the Bank of England said: ‘Global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained elevated. Wholesale gas futures and oil prices have fallen materially.
‘There have been large and volatile moves in global financial markets, in particular since the failure of Silicon Valley Bank and in the run-up to UBS’s purchase of Credit Suisse, and reflecting market concerns about the possible broader impact of these events.
‘Overall, government bond yields are broadly unchanged and risky asset prices are somewhat lower than at the time of the Committee’s previous meeting.
‘The Bank of England’s Financial Policy Committee (FPC) has briefed the MPC about recent global banking sector developments.
‘The FPC judges that the UK banking system maintains robust capital and strong liquidity positions, and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates. The FPC’s assessment is that the UK banking system remains resilient.
‘Reflecting these developments, bank wholesale funding costs have risen in the United Kingdom and other advanced economies.
‘The MPC will continue to monitor closely any effects on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook.
‘Additional fiscal support was announced in the Spring Budget. Bank staff have provisionally estimated that this could, relative to the February Report, increase the level of GDP by around 0.3% over coming years.
‘A full assessment, including the extent to which these measures could affect supply as well as demand in the medium term, will be conducted ahead of the May Monetary Policy Report.’