Please see below an article from Evelyn Partners, which was published and received earlier today (23/03/2023) and covers their views on the Bank of England’s monetary policy decision to raise interest rates by 25bps:
What happened?
The Bank of England increased rates by 0.25% today at their March monetary policy meeting, which is in line with market and economic expectations. This takes the base rate to 4.25%, its highest level since 2008. The Monetary Policy Committee (MPC) voted 7-2 in favour of 25bps – 0bps respectively so policymakers continue to have diverse view on the best course for rates, although to a lesser extent than the 3-way split seen in December.
What does it mean?
When making their decision, committee members would have been weighing the fragility of the banking sector against the need to bring inflation back to target.
On one hand the recent turmoil in the banking sector, which began with collapse of Silicon Valley Bank (SVB), will remind central banks that things can break when monetary policy is rapidly tightened. Although contagion risks look to have receded for the time being, the BoE will need to tread carefully if they decide to further tighten monetary policy from here. The BoE recently acknowledged: ‘more sharp moves in asset prices could expose weakness in parts of Britain’s financial system’ in a letter to law makers.
On the other hand, yesterday’s CPI print showed that inflation re-accelerated in February with both headline and core CPI posting a gain of 1.1% and 1.2% respectively for the month. On top of this the labour market continues to remain tight putting pressure on wage growth which could further stoke inflation and cause it to become entrenched.
Moreover, recent UK economic data has been surprising on the upside: February’s PMI readings came in well above consensus with the composite figure reported at 53.0, consistent with a recovery in economic growth. Growth expectations are likely to get a boost as falling energy prices feed through to a reduction in household expenditures, boosting real incomes and stimulating the economy. A boost to growth could cause inflation to decelerate slower the than the BoE’s forecasts currently expect, which may cause monetary policy to remain tighter for longer in response.
In sum, today’s decision to increase the base rate indicates two things. First, the battle against inflation is not yet won. Second, the Bank is confident in its ability, and tools, to maintain financial stability.
Bottom Line
Today’s 25 basis point rate hike by the BoE signals there is still more work to be done to tame rampant inflation, as well as highlighting the banks need to remain cognisant of the risks over-tightening can pose to the economy.
Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Carl Mitchell – Dip PFS
Independent Financial Adviser
23/03/2023