Bank of England hikes interest rates again and declares UK banks 'resilient'

How are people coping with the rising cost of food and mortgage repayments? ITV News' Joel Hill reports.

There’s nothing like a bank run to focus the mind and in the space of two weeks we’ve witnessed several. The failure of Silicon Valley Bank and the bail out of Credit Suisse were evidence that higher interest rates can hurt banks as well as their customers. Undaunted, the Bank of England has today raised Bank Rate by 0.25% - the eleventh consecutive increase since November 2021 - as the fight to cool white-hot inflation continues. Underpinning the decision is an assumption that the UK banking system is in very good health. “Robust” and “resilient” is the Bank of England’s assessment. UK Banks, it concludes, are “well-placed” to continue lending to households as businesses although, as the minutes concede, it’s too soon to judge how wary they will following events elsewhere.

A credit crunch now would slow economic activity in much the same way the Bank of England is hoping to by raising interest rates. The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to raise Bank Rate. Only last month the Governor of the Bank said he believed “we are beginning to turn the corner” in getting inflation back under control. Now, the view appears to be that there’s more work to do. There is a case for raising interest rates: the headline rate of inflation jumped unexpectedly in February to 10.4% - that’s 0.6% higher than the Bank of England was expecting.

Andrew Bailey, Governor of the Bank of England, during a BoE Monetary Policy Report Press Conference. Credit: PA

Global economic growth have proved stronger than the Bank was expecting, so too has growth in the UK. Last month the Bank forecast the UK was entering a shallow recession that would last until Spring 2024, now it’s not so sure. Growth in the second quarter of this year (April - June) is expected to be positive. In theory, the Bank’s worries are unchanged: inflation is well above its 2% target and there’s a risk it is becoming embedded as employees demand higher pay and companies raise their prices to sustain their profits. In practice, the MPC’s minutes concede that the evidence these things are happening isn’t strong. Employment growth is strong and companies still complain about recruitment problems but private sector earnings are coming in lower than the Bank expected and wage growth “is likely to fall back somewhat more quickly that projected”.

The Bank still believes the headline rate of inflation will “fall significantly” in the months to come and to a “lower rate than anticipated in the February report”. The future is unknowable and the outlook particularly uncertain. Clearly in doubt, the Bank has decided the safe thing to do is increase the cost of borrowing again. The scale and pace of the interest rate rises we have seen is enormous and the full force has yet to be felt. According to Moneyfacts, the monthly repayment of the average two-year fixed rate mortgage has risen by £325 in the last fifteen months. Today’s decision adds an extra £30 a month on top. Most home owners in the UK are on fixed rate deals but households are refinancing at a run-rate of 150,000 a month. Those that do are in for a nasty shock.

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