The Bank of England (BoE) voted 7-2 to raise the key policy rate by 25bps to 4.25% in line with expectations following the move from the Federal Reserve yesterday and the surprise leap in inflation during February. Higher growth, employment and inflation when compared to the February Monetary Policy Report were all crucial factors.   

Having said that, the Monetary Policy Committee highlights that uncertainties around the financial and economic outlook have risen and that it will continue to closely monitor the effects of recent financial distress on credit conditions, growth and inflation.

UK economy expected to grow faster in Q2

The Bank of England notes that global economic growth in Q1 would be stronger than its expectations, led by the US, EEA, and China. Core inflation in all these territories has also been stronger than Bank of England expectations. Meanwhile, the Bank of England expects the UK economy to grow faster in Q2 as a result of lower energy prices, more fiscal support on energy price caps and capex and a higher than expected employment growth. CPI inflation is expected to fall more swiftly, largely on account of lower energy prices, but also because the Bank of England expects wage growth to fall back more quickly than previously expected. 

Thus it would appear that the goldilocks narrative for the UK continues with upgrades to growth forecasts and downgrades to inflation projections. However, the baseline matters and the UK’s economic outlook is improving against extremely depressed expectations. Crucially, the global economy is facing enormous uncertainty about the impact of one of the swiftest global tightening cycles in recent history on financing conditions.  

Central Banks Taking Balanced Approach Amid Uncertainty

The significant tightening in credit conditions as a result of recent global banking sector developments has made it particularly challenging for central banks to pursue their price stability mandate against rising financial stability risks. Central banks including the ECB, the Fed, and the Bank of England today have adopted a fairly cautious and yet balanced approach in dealing with the incredibly high level of uncertainty. All three central banks raised rates as expected, whilst maintaining that future policy decisions will depend on the incoming data and in particular the extent and duration of tightening in financing conditions from recent events. Inflation clearly remains a concern especially when the labour market is facing structural supply-side constraints, but the balance of risks is shifting rather swiftly to growth risks.