Bank of England raises interest rates to 4.25%

The central bank’s monetary policy committee voted seven to two to raise the interest rate by 25 basis points, taking it to 4.25 per cent.

The two dissenting members voted to maintain the rate at 4 per cent.

In the meeting on March 23, the MPC said global growth is expected to be stronger than originally projected in its report released in February, and that core consumer price inflation remains elevated. 

Going forward, it will be hoped this will be the final rate hike before a period of pause to assess how the rate hikes are taking effect

Richard Carter, Quilter Cheviot

Pressure had been building on the central bank to raise interest rates after UK inflation unexpectedly accelerated to 10.4 per cent in February.

However, there is concern that the swift interest rate rise will cause more trouble in the banking sector.

The collapse of Silicon Valley Bank and resulting “shotgun marriage” of UBS and Credit Suisse, to save the latter from also collapsing, have all been blamed on the speed of interest rate rises in the US.

The MPC noted that there have been “large and volatile” moves in global financial markets since the collapse of SVB, reflecting market concerns about the possible broader impact of these events.

However, the BoE’s Financial Policy Committee, which has briefed the MPC, said the UK banking system maintains robust capital and strong liquidity positions.

“The FPC’s assessment is that the UK banking system remains resilient,” the committee said.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “After the inflation figure [on March 21], the Bank of England had no choice but to raise interest rates today.

“It will have been somewhat spooked by inflation rising, and it makes the prediction that inflation will stand at just 2.9 per cent by the end of the year even more difficult to achieve.

“However, the contagion in the banking system appears to have been contained for now, giving it some cover to raise rates without being overly concerned it will tip the balance for any banks that are under duress,” he continued.

“Furthermore, the UK banking system has much more stringent regulation and capital adequacy rules, so the system should be able to handle this rate rise.”

Carter added: “Going forward, it will be hoped this will be the final rate hike before a period of pause to assess how the rate hikes are taking effect.”

This article originally appeared on FTAdviser.com