Bank of England expects inflation to cool faster, hikes interest rates again

The Bank of England raised interest rates by 0.25 per cent on Thursday (23) and expressed optimism that the recent surge in British inflation would cool down faster than anticipated, despite a surprise increase in price growth last month.

The Bank's decision was in line with expectations from a Reuters survey of economists, with seven of its nine rate-setters voting for the increase.

This marked the eleventh consecutive time the Bank raised borrowing costs, but the smallest increase since June.

While two members of the Monetary Policy Committee voted to keep rates on hold, Catherine Mann supported the modest 25 basis-point increase, despite being known for advocating for larger increases. The Bank's outlook for the country's sluggish economy was more positive overall.

The BoE - which is trying to reconcile a weak economic outlook and anxieties about global banks with stubbornly high inflation - kept unchanged its message that the MPC saw less urgency about maintaining its fast run of rate hikes.

"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," the BoE said.

"If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required."

BoE Governor Andrew Bailey and his colleagues last month said that they were ready to act forcefully if the outlook suggested persistent inflationary pressures.

Sterling firmed against the US dollar and the euro while British government bond prices were little changed after the announcement. Investors in rate futures markets positioned themselves for one more 25 basis-point move by the BoE, putting a roughly 50 per cent chance on a quarter-point increase as soon as May.

Finance minister Jeremy Hunt said he supported Thursday's rate hike as part of Britain's battle against high inflation.

Karen Ward, chief market strategist EMEA at J.P. Morgan Asset Management, said the prospect of persistent inflation was a bigger worry in Britain than elsewhere, adding that the BoE should refrain from offering guidance about future policy.

"Over the past year they have frequently signalled a view that they expect interest rates to peak at current levels but then the inflation data has proved otherwise," Ward said.

(Reuters)