Bank of England Raises Interest Rates 25bps to 4.25%, Projects Inflation Likely Peaked

The Bank of England MPC at its March meeting Thursday raised the key bank rate by 25 bps from 4.00% to 4.20% as expected. It was the 11th consecutive rate hike and BoE’s benchmark rate puts the cost of borrowing at the highest level since late-2008. The vote was 7-2 (Tenreyro and Dhingra voted to keep rates unchanged, similar to the last meeting). The BoE’s projections again suggested CPI inflation has reached its peak, with Q2 CPI likely to be lower than forecast in February, due to longer energy price cap and lower wholesale prices.

Looking ahead, further tightening of monetary policy would be necessary “if there were to be signs of more persistent pressures.”


It had been the first time since January 2009 that the rate has been higher than 1%. At its May meeting, the BoE increased the base rate to 1%. Today was its 11th consecutive increase in borrowing costs which began in December 2021, although it was the smallest rise since June last year.


Bank of England announced February 2, 2023, monetary policy decision

  • BOE raises bank rate 25 bps to 4.25%, as expected
  • Bank rate vote 7-2 vs 7-2 expected (Tenreyro and Dhingra voted to keep rates unchanged, similar to the December meeting)
  • Further increases in bank rate may be required
  • The BOE sounding more upbeat about the outlook for the country’s slow pace of economic growth.
  • CPI likely to have peaked
  • BoE Decision Maker Panel: see year-ahead inflation of 5.6% in 3 months to February vs 6.2% in 3 months to November

The Bank of England was the first of its major global central bank peers to raise rates in this cycle. The Federal Reserve raised rates by a quarter of a percent at their March meeting. The interest rate before the pandemic were set at 0.75% before the first wave spread to Britain in early 2020.

The rise in borrowing costs will add further pressure on household budgets already burdened by a sharp rise in energy and food prices next month, and the prospect of higher taxes.

United Kingdom Interest Rate
Bank of England Rates

Inflation Crushing Economic Growth

Inflation is at the highest rate for a decade, the sharpest annual incline for 10 years and well above the Bank’s 2% target. 

BOE’s Bailey Comments:

  • We believe inflation will fall quite rapidly before the summer
  • Feb inflation data means we need to see fall in inflation happen
  • We will go on making decisions needed for sustained, low inflation
  • We have been able to fix problems in banks
  • We have raised interest rates a lot already

Monetary Policy Summary, March 2023

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 22 March 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.25 percentage points, to 4.25%. Two members preferred to maintain Bank Rate at 4%.

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.

GDP is still likely to have been broadly flat around the turn of the year, but is now expected to increase slightly in the second quarter, compared with the 0.4% decline anticipated in the February Report. As the Government’s Energy Price Guarantee (EPG) will be maintained at £2,500 for three further months from April, real household disposable income could remain broadly flat in the near term, rather than falling significantly. The labour market has remained tight, while the news since the MPC’s previous meeting points to stronger-than-expected employment growth in 2023 Q2 and a flat rather than rising unemployment rate.

Twelve-month CPI inflation fell from 10.5% in December to 10.1% in January but then rose to 10.4% in February, 0.6 percentage points higher than expected in the February Report. As a consequence, the exchange of open letters between the Governor and the Chancellor of the Exchequer is being published alongside this monetary policy announcement. Services CPI inflation was 6.6% in February, 0.1 percentage points weaker than expected at the time of the February Report, but food and core goods price inflation have been significantly stronger than projected. Most of the surprising strength in the core goods component was accounted for by higher clothing and footwear prices, which tend to be volatile and could therefore prove less persistent. Annual private sector regular earnings growth has eased, to 7% in the three months to January, 0.1 percentage points below the expectation in February.

CPI inflation is still expected to fall significantly in 2023 Q2, to a lower rate than anticipated in the February Report. This lower-than-expected rate is largely due to the near-term news in the Budget including on the EPG, alongside the falls in wholesale energy prices. Services CPI inflation is expected to remain broadly unchanged in the near term, but wage growth is likely to fall back somewhat more quickly than projected in the February Report.

The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has been subject to a sequence of very large and overlapping shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.

The Committee has voted to increase Bank Rate by 0.25 percentage points, to 4.25%, at this meeting. CPI inflation increased unexpectedly in the latest release, but it remains likely to fall sharply over the rest of the year. Services inflation has been broadly in line with expectations. The labour market has remained tight, and the near-term paths of GDP and employment are likely to be somewhat stronger than expected previously. Although nominal wage growth has been weaker than expected, cost and price pressures have remained elevated.

The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. Uncertainties around the financial and economic outlook have risen.

The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

The MPC will make a full assessment of all of the news since the February Report, including the economic implications of recent financial market and banking sector developments, as part of its forthcoming May forecast round.

The MPC will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.

Source: Bank of England

From The TradersCommunity News Desk