Inflation Jump Causes Bank Of England To Hike Interest Rates By 25bps

Today saw a hike in interest rates from The Bank of England (BoE), with an increase of 25 basis points announced amid the continued turmoil as the banking sector continues to clash with the desire of the central bank to bring down inflation. While two central bank members opted to maintain current rates at 4%, five opted for a 4.25% hike in interest rates, leaving them split seven/two.

The bank’s Monetary Policy Committee (MPC) recently described the UK banking system as “resilient” in the face of “large and volatile moves in global financial markets”, thanks to its “robust capital and strong liquidity positions”. Despite this, they forecast a slightly more positive growth outlook for this year’s second quarter, where we have been anticipating a 0.4% decrease following the predictions of the MPC’s last meeting.

It’s Not What Was Expected

There had been speculation in the wake of US regional banks – like Silicon Valley Bank – collapsing and the turmoil surrounding Credit Suisse that we wouldn’t see a hike from the bank in a bid to maintain the market’s stability.

However, the reality we now face is quite different following data from February revealing that inflation has not dropped into single digits, despite many predicting it would. Instead, inflation has risen to 10.4%, while we’ve seen a sharp shift in futures markets, eventually indicating a 99% chance that the central bank would hike rates.

The MPC has now reported a sudden rise in CPI inflation. This is, however, likely to fall over the rest of the year. This move comes in the wake of yesterday’s (March 22nd) announcement that the US central bank would raise their rates by 25bp to maintain the balance between the banking sector and inflation rates.

What Does It Mean?

John Westwood, group chairman at Blacktower Financial Management, views the rise as an indicator that action is needed. “The outlook the chancellor has outlined is certainly positive,” he commented. “However, today’s action and yesterday’s announcement shows that the banks are still firmly in favour of action of some kind.”

He furthered this by pointing out that “the base rate rise has the potential to ignite further talk about investment strategies. It also marks another high point; rates haven’t been higher than they currently are since October of 2008. We’re also looking at the 11th hike in a row since December 2001.”

This rise in interest rates may benefit savers in the returns seen on their accounts, as financial institutions and banks need to align their interest rates with the BoE’s base rate. “Shop around,” John advises, “banks won’t increase their rates simultaneously; some will do so quicker than others. It’s also worth looking at bonds, fixed-term deposits, and diversifying investments to take advantage of the current climate for maximum advantage.”