The Bank of England has raised the base rate by 0.5% to 5% in a more aggressive move than had been anticipated.
Yesterday’s higher than expected inflation figure of 8.7% appears to have pushed Andrew Bailey and colleagues into taking stronger measures.
The committee voted 7 – 2 in favour of the larger hike and reiterated its determination to meet the challenge of taming inflation.
In the accompanying commentary Bailey said returning inflation to near its 2% target is the ‘absolute priority.’ This implies the Bank has no intention of changing course in response to the rising risk it will cause a recession.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Following yesterday’s shock inflation reading, it has clearly spooked the Bank of England into taking more drastic action than predicted with a 50bps increase in interest rates.
“Until inflation begins coming down to more palatable levels the Bank of England will continue to put the brakes on the economy and as such the UK once again finds itself staring down the barrel of interest rate rises and economic strife.
“It is perhaps becoming clearer that due to the UK’s more unique set of economic circumstances, recession may be the only option to bring inflation down. While the UK avoided recession at the turn of the year, it does not mean one is not lurking further down the tracks.
Seema Shah, chief global strategist at Principal Asset Management, commented: “The deeply worrying core inflation print yesterday had meant a 0.5% hike from the Bank of England today was a necessity. For the Bank, there is no space for dithering or confusing messages now. The UK has the unenviable title of highest core inflation rate in the G7, and by quite some margin.
“It requires the central bank to adopt a clearly hawkish attitude that signals further sizeable moves over the coming months, emphasising the severity of the situation. A sharper slowdown of the UK economy will be an unfortunate, but necessary, fallout from monetary policy.”
Neil Birrell, chief investment officer at Premier Miton Investors, added that the Bank has opted to launch a ‘rate grenade’ at the spectre of inflation.
“As yesterday’s CPI data showed, inflation seems to be more embedded in the UK than elsewhere, leaving the Bank with little option than to act tough,” he said. “The size of this hike is, however, a surprise. The fear is that this could rapidly tip the economy into a recession, but that is obviously not deemed to be as bad an outcome as the risk of ongoing elevated inflation.”
