The Bank of England raised interest rates by a quarter-point on Thursday, its 11th consecutive rate increase, which came just a day after data showed that Britain’s inflation rate unexpectedly increased last month.
Consumer prices rose 10.4 percent in February from a year earlier, up from 10.1 percent the month before, ending a three-month downward trend and stubbornly keeping inflation in the double digits, according to data from the Office for National Statistics published on Wednesday.
The Bank of England’s policy decision came amid a period of heightening tension for central banks as turmoil in the U.S. banking system has created the sense that policymakers on both sides of the Atlantic are battling two opposing risks: that inflation will remain persistent and need to be tackled with higher interest rates, and that higher rates will worsen the turmoil in the banking sector. On Wednesday, the U.S. Federal Reserve raised interest rates by a quarter of a percentage point and implied it would carry out just one more rate increase this year.
The committee at the Bank of England in charge of maintaining financial stability told rate-setters that Britain’s banking system was “resilient” and able to withstand a range of economic scenarios, including a period of higher interest rates, according to the minutes of this week’s meeting.
Earlier on Thursday, the Swiss National Bank, the country’s central bank, raised interest rates by half a percentage point, to 1.5 percent, to counter “the renewed increase in inflationary pressures” in Switzerland. The decision came just days after one of the country’s largest banks, Credit Suisse, was bought by its larger rival, UBS, in a deal hastily brokered by the government, to stem a growing banking crisis. The central bank said it was “providing large amounts of liquidity assistance” in Swiss francs and foreign currency.
Since December 2021, the Bank of England’s policymakers have raised interest rates to 4.25 percent, from near zero, in an effort to stamp out the threat of persistently high inflation.
Last month, the bank shifted its tone to indicate that future interest rate increases were not a given and instead policymakers would respond to signs of inflation being embedded in the economy, leading analysts to expect the bank was close to halting rate increases. Policymakers stuck to this message this week.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the minutes said.
The Bank of England forecast that the inflation rate would fall significantly this year, and average about 4 percent around the end of the year. In fact, inflation should fall more than expected in the second quarter of this year because of the government’s decision to extend its subsidy for household energy bills for an additional three months to the end of June. And wage growth has been weaker than expected, easing policymakers’ concerns that high wages in the private sector would make it harder to return inflation to the bank’s 2 percent target.
Andrew Bailey, the governor of the central bank, told reporters after last month’s meeting that there had been a “turning of the corner” on inflation but warned “it’s very early days, and the risks are very large.”
To some extent, those risks materialized in the surprising upturn in Wednesday’s data, which showed food prices rising in February at their fastest pace in 45 years and a measure of services inflation increasing. This week’s meeting showed the challenge the bank faces in determining the path of inflation.
The increase in inflation, which was 0.6 percentage point higher last month than the central bank expected, came from rising food prices and higher prices for goods, namely clothing and footwear. Those prices “tend to be volatile and could therefore prove less persistent,” according to the minutes of the bank’s meeting.
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