Bank of England lifts interest rate at slowest pace since June

The Bank of England pushed ahead with another interest rate increase despite turmoil in the banking sector, predicting the UK economy will avoid a recession for now and that inflation remains a risk.

The central bank raised its benchmark lending rate as expected by a quarter point to 4.25 per cent, the highest since 2008, and left the door open to further increases if inflation persists. Policy makers voted 7-2 for the hike, with none of the BOE staff joining the dissent.

Governor Andrew Bailey and his colleagues are seeking to keep a lid on soaring prices at a time when turmoil in financial markets is threatening to upend the outlook for the economy. The BOE brushed aside concerns about the banking system after the rescue of two major institutions abroad, suggesting policy makers see inflation as the main priority.

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” minutes of the meeting released Thursday said, a guidance that’s in step with what the BOE said in February.

The remarks temper the thought that the BOE is ready to call a halt to its quickest tightening spree in three decades. Investors last week had started to bet on a pause for rate rises but quickly reversed those positions after an unexpected jump in inflation data released on Wednesday.

Minutes of the meeting provided no new commentary on the turmoil that engulfed Credit Suisse Group AG and Silicon Valley Bank. The BOE’s Financial Policy Committee told officials that the UK banking system remains well capitalized and “resilient” to absorb shocks.

That strengthened the sense that the BOE will operate its monetary policy independently of the moves to clear up trouble in the banking system. Bailey may address the matter next week in a speech scheduled for Monday and an appearance in Parliament on Tuesday.

For the majority of the nine-member Monetary Policy Committee, inflation was 0.6 per cent stronger than anticipated last month and the labor market remained tight enough to fan concerns about a wage-price spiral. They also noted that the economy was much stronger than anticipated last month, so much that officials no longer expect a contraction in the second quarter as they had predicted in February.

“The stronger domestic and global outlook for demand was also being driven by factors over and above the weaker path of energy prices,” minutes of the meeting said.

Silvana Tenreyro and Swati Dhingra voted for no change in rates, arguing that previous hikes are still feeding through to the economy. They said the current policy rate is restrictive enough that the BOE may soon have to reverse those moves.

The BOE’s 11th straight increase follows hikes at the US Federal Reserve and European Central Bank, with rate-setters around the globe saying their priority is the battle to tame inflation.

The BOE said the global and UK economies have been more resilient than expected.

It expects GDP to rise slightly in the second quarter, a sharp upgrade from the 0.4 per cent decline it projected last month. Budget stimulus announced by Chancellor of the Exchequer Jeremy Hunt last week will boost GDP by 0.3 per cent over the coming years.

While inflation has “surprised significantly on the upside”, it still expects price growth to cool sharply in the coming months. The extension of more generous government energy support and continued falls in wholesale gas prices will drag down inflation from double digits, the BOE said.

The policy makers said the labor market remains tight but they also saw signs that wage growth will ease more quickly than previously thought. Unemployment is no longer expected to begin increasing in the second quarter.