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Bank of England interest rate decision
Newsflash: The Bank of England has lifted UK interest rate to a near 15-year high.
The BoE’s Monetary Policy Committee has voted to raise Bank Rate to 4.25%, from 4%.
This is the 11th increase in UK interest rates in a row, as the Bank battles inflation – which rose to 10.4% in February, dashing hopes that prices pressures were easing.
It lifts UK interest rates to their highest since October 2008, early in the financial crisis, when Bank Rate was 4.5%.
Key events
Jeremy Hunt welcomes interest rate hike
Chancellor Jeremy Hunt has welcomed the Bank of England’s decision, saying it will help get a ‘grip’ on rising prices:
“With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone.
“That’s why we support the Bank of England’s actions today and why we will continue to play our part in this fight by being responsible with the public finances, alongside providing cost of living support worth an average of £3300 per household over this year and next.”
UK interest rate rise: what it means for you
Here’s an explanation about what today’s interest rate rise will mean for your finances:
Today’s hike in borrowing costs is a blow to borrowers, and will push up the cost of variable-rate mortgages.
Brian Murphy, head of lending at Mortgage Advice Bureau, says:
“Today’s interest rate rise will be another bitter pill to swallow. It will feel like a double whammy of bad news for those on variable rate deals, after the cost-of-living showed no signs of slowing down last month. As for the roughly 400,000, fixed deals due to expire in Q2, there is some good news. Despite today’s rise, the rates on two and five-year fixes continue to fall and have reached a six-month low.
“There is also some light at the end of the tunnel for those on variable rates. It looks like we’re fast approaching the summit of the interest rate hikes, and there are hopes that the cost of borrowing will start to decrease.”
Here’s property agent Emma Fildes of Brick Weaver:
The Bank of England raised rates by 0.25% to 4.25% today in an attempt to soothe inflation after it flared back up to 10.4% yesterday. This treatment may prove costly to bank stability & to many looking to secure a mortgage https://t.co/EvogPlg5ul
— Emma Fildes (@emmafildes) March 23, 2023
Here’s the BBC’s Faisal Islam on the Bank’s decision:
NEW
Bank of England raises UK base rates to 4.25%, highest in 14 years.
Bank reiterates suggestion that further rises only “if evidence” of further inflationary pressure, minutes play that down.
No technical recession now forecast, broadly flat, as growth boosted by budget.
— Faisal Islam (@faisalislam) March 23, 2023
Bank also predicts inflation to fall even more sharply despite yesterdays shock number.
7-2 vote for rate rise.
Will consider everything in May with new forecast.
Looks to me that we might be pausing then.
— Faisal Islam (@faisalislam) March 23, 2023
The “additional fiscal support” announced by Jeremy Hunt in the Spring Budget could lift UK GDP by 0.3% compared to February’s forecasts, the MPC says.
But, the Bank of England will conduct a full assessment, including the extent to which these measures could affect supply as well as demand in the medium term, ahead of its May Monetary Policy Report (when it updates its economic forecasts).
NEW
– @Bankofengland raises interest rates by a further 0.25 percentage points to 4.25%
– 11th successive increase. Rates now at highest level since 2008.
– However BoE also reveals it no longer expects the UK to face a technical recession this year.
More on @skynews soon…— Ed Conway (@EdConwaySky) March 23, 2023
Why the Bank of England raised interest rates again
The Bank of England voted to raise interest rates today despite believing that inflation will drop sharply in the next few months.
CPI inflation is still expected to “fall significantly” in 2023 Q2, to a lower rate than anticipated in the February Report, it says, partly due to the freeze on household energy bills.
The minutes of this week’s meeting say:
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 economy has been subject to a sequence of “very large and overlapping shocks”, the Bank points out, and it will use monetary policy to anchor longer-term inflation expectations at its 2% target.
The minutes say:
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 Bank of England has also lifted its forecast for UK growth in the first half of this year.
It points out that Jeremy Hunt’s Budget Day decision to freeze the energy price guarantee until the end of June (meaning a typical household pays £2,500 per year, rather than £3,000) will support household incomes.
The minutes of today’s meeting say:
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.
The Bank of England has raised its forecast for global growth, despite the recent turmoil in the banking sector.
The minutes of this week’s meeting say:
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.
The Bank says the Monetary Policy Committee (who set interest rates) have been briefed by its Financial Policy Committee 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.
Bank split 7-2 on rate decision
Today’s decision was not unanimous, with the nine members of the Monetary Policy Committee split 7-2 over where to set interest rates.
Seven members (governor Andrew Bailey, plus Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill and Dave Ramsden) voted in favour of raising Bank Rate by a quarter-point, to 4.25%.
But two members, Swati Dhingra and Silvana Tenreyro, voted against the proposition, preferring to maintain Bank Rate at 4%. They are the two most dovish members of the committee.
Dhingra and Tenreyro argued that as the effects of the energy price shock and other cost-push shocks unwound, headline CPI inflation should fall sharply over 2023.
Tht would reduce the “associated persistence in domestic price setting”.
At the same time, the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through, they argued.
Bank of England interest rate decision
Newsflash: The Bank of England has lifted UK interest rate to a near 15-year high.
The BoE’s Monetary Policy Committee has voted to raise Bank Rate to 4.25%, from 4%.
This is the 11th increase in UK interest rates in a row, as the Bank battles inflation – which rose to 10.4% in February, dashing hopes that prices pressures were easing.
It lifts UK interest rates to their highest since October 2008, early in the financial crisis, when Bank Rate was 4.5%.
Tension is rising in the City, with less than 15 minutes to go until the Bank of England reveals its decision on UK interest rates.
The money markets currently indicate that a quarter-point increase in Bank Rate, to 4.25%, is a 95% probability, with only a small possibility of ‘no change’.
But the Monetary Policy Committee could surprise us, as they did in November 2021 when they left interest rates on hold.
Blog reader Charlie Lloyd has got in touch to warn that whatever the outcome of today’s BOE meeting, the trajectory of inflation is clear.
Charlie explains:
Monetary policy acts with long and variable lags and central banks are simply shooting in the dark at this point. Global credit conditions are set to tighten significantly in light of recent events, and commodity prices have fallen sharply.
Headline inflation, much like unemployment data, is a lagging indicator, and most forward looking indicators suggest inflation is set to fall considerably in the coming quarters. This has been corroborated by bond markets.
Central banks were too slow to tighten policy, and will inevitably over-tighten, as per previous rate hiking cycles. When the US data starts to turn, bond yields will fall very quickly (in my view!).
Kevin Barry QS is struck by Danny Blanchflower’s call for interest rates to be cut (see 9.30am post), saying:
If Blanchflower predicted 2008 crash and sees correlations now, interest rate rises today are setting the scene for 2023 crash! Depositors will panic and move to safe havens, under the bed…
Kevin G asks an excellent question – why does the Bank of England think raising interest rates will bring down inflation, given that rising prices have been driven by energy costs and food?
To my understanding, this inflation is being caused by the high cost of gas and energy, the rising cost of food which is set by the supplier, basically things that are out of control of the regular people.
How is raising the interest rate going to cause the decrease in the things that are out of the control of the UK population?
We’ll find out the Bank’s thinking at noon – when it releases the minutes of this week’s meeting. Last month, though, the MPC pointed out that inflation expectations remained “elevated” – the theory is that hiking borrowing costs will persuade people that inflation will fall, making them less likely to push for inflation-matching pay rises.
The flaw in this logic is that inflation is a measure of price rises, not wage increases, and companies have been successfully raising their prices, leading to worries about ‘greedflation’:
Message us your views
We’re testing a new feature in the blog today, which lets readers send through messages to us here at the Guardian.
They’re not public comments – we are the only ones who will see your message, but I will monitor them and try to respond in the liveblog.
So you can let us know your views on today’s Bank of England interest rate decision, the cost of living crisis, the turmoil in the banking sector, or other business events in the news…
To try it, click the ‘Send us a message’ under my byline near the top of this blog. Thanks!
Small signs of positive improvement in UK business conditions
There are “small signs” of improvement in the UK economy, the Office for National Statistics reports this morning.
Its latest realtime data, assessing business conditions, shows “small signs of positive improvement for some measures”.
That would cheer the Bank of England, as it tries to cool inflation without sinking the economy.
The ONS warns, though, that its too early to know if this is the start of a longer-term change in conditions.
There’s been a fall in the number of businesses reporting lower turnover, and fewer companies say they have to pay more for their goods and services.
The ONS says:
In February 2023, a quarter (25%) of trading businesses reported their turnover was lower compared with January 2023, while 16% reported their turnover was higher; therefore, a net 9% of businesses reported their turnover decreased, this is up from a negative net position of 13% in January 2023.
More than one in five (22%) trading businesses expect turnover to increase in April 2023, while 12% of businesses expect turnover to decrease; the net 9% of businesses expecting turnover to increase is the highest net position since the question was first asked in April 2022.
More than a third (37%) of trading businesses reported an increase in the prices of goods or services bought in February 2023 compared with January 2023; this proportion has been falling since the first time the question was asked in March 2022 (50%).
62% of trading businesses said they had been affected in some way by price rises. The most reported effects were
▪️ absorbing costs (41%)
▪️ passing on price increases to customers (27%)
▪️ changing suppliers (12%)— Office for National Statistics (ONS) (@ONS) March 23, 2023
Bloomberg: breakfast price index reaches new high after UK food shortages
An index of breakfast ingredients has hit a new high, as food shortages drove up prices in the UK shops.
Bloomberg reports that the average cost of products to make a traditional fry-up rose by more than 22% from a year earlier in February.
It was the second straight month that the Breakfast Index increased by more than 20%, based on yesterday’s UK inflation report.
Bloomberg explains:
The price of a basket of English breakfast items soared past £35 as vegetable shortages in supermarkets fueled a surprise jump in UK inflation.
Tomato prices rose 6.4% in February compared with the previous month, the second-biggest riser in the latest Bloomberg Breakfast Index behind bread.
A supply crisis caused grocers such as Tesco and J Sainsbury to restrict sales of certain produce to three per person last month, while pictures on social media showed empty shelves across the country.
More here.
The UK stock market has dropped into the red this morning, ahead of the Bank of England’s decision on interest rates at noon.
The FTSE 100 index of blue-chip shares has shed 66 points, or 0.85%, to 7,501, away from yesterday’s one-week high.
The stronger pound is weighing on exporters’ share prices.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, says the Bank of England decision is in focus after last night’s Federal Reserve rate hikes, with banking nerves still on edge.
With the banking sector not out of the woods and central bank and US treasury officials still on edge, uneasy about what may lie ahead, a sense of nervousness is still hanging over the markets. The FTSE 100 has opened in negative territory, following in Wall Street’s footsteps, with the S&P 500 closing sharply lower, as the Federal Reserve raised rates but signalled a pause was on the horizon given recent turmoil.
Because contagion has been contained, and inflation is still far too high, the Federal Reserve stuck to its plan and lifted rates by 0.25%.
Achieving price stability is still the top priority, given the pain high prices have been causing right through the economy.
Germany risks running out of gas next winter, warns regulator
Jillian Ambrose
Europe’s energy woes may drag on into next winter, according to Germany’s energy watchdog, our energy correspondent Jillian Ambrose writes.
Klaus Müller, the head of the Federal Network Agency, told the Financial Times that the “danger of a gas shortage is still there”, and warned that households and businesses will need to cut gas use further to avoid an energy crunch next winter.
Germany is a key gas trading hub within Europe, and in the past has acted as a conduit for gas imports from Russia to the rest of the continent through a network of gas pipelines.
Another winter of tight gas supplies and higher prices in the German gas market would likely lead to higher prices across Europe too.
The coming winter will be a key test for Germany, according to Müller, because it will be its first winter without any Russian pipeline gas imports. China’s economic recovery could stoke demand for gas on international markets leading to higher global prices too.
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