Bank of England hikes rates again but shows jitters over growth outlook By Reuters

By Andy Bruce and David Milliken

LONDON (Reuters) -The Bank of England raised interest rates on Thursday in a bid to stop fast-rising inflation becoming embedded, but with households facing a huge hit from soaring energy bills, it softened its language on the need for more increases.

Eight of the nine Monetary Policy Committee (MPC) members voted to raise Bank Rate to 0.75% from 0.5%, their third hike in as many meetings and taking rates back to their pre-pandemic level.

On Wednesday, the US Federal Reserve also raised borrowing costs, the first time it had done so since the COVID-19 pandemic.

BoE Deputy Governor Jon Cunliffe was the sole advocate of keeping rates on hold, warning of a big hit to demand from higher commodity prices. Economists polled by Reuters had expected a unanimous vote.

The BoE said inflation was set to reach around 8% in April – almost a percentage point more than it forecast last month and four times its 2% target – and warned it could peak even higher later in the year.

Soaring energy bills, driven even higher by the conflict in Ukraine, meant the squeeze on British household budgets was likely to be much bigger than the BoE had predicted last month – which itself was set to be the biggest in 30 years.

Reflecting these worries about the outlook for growth, policymakers on Thursday pushed back against investors’ bets that Bank Rate will rise sharply to around 2% by the end of this year, toning down its language on the need for more hikes.

“The Committee judged that some further modest tightening might be appropriate in the coming months, but there were risks on both sides of that judgment depending on how medium-term prospects evolved,” the BoE said.

Last month the MPC said further modest tightening “is likely to be appropriate”.

The pound slumped almost a cent against the dollar and British government bond prices jumped as investors trimmed their bets that the BoE would raise rates rapidly this year.

“The MPC are clearly making moves to counter rising inflation. But they will be walking a tightrope in the months ahead,” Confederation of British Industry economist Alpesh Paleja said.

Samuel Tombs, an economist at Pantheon Macroeconomics, said an end to BoE rate hikes was in sight.

“Today’s minutes leave us more confident in our view that the rate hiking cycle will stall after the Committee increases Bank Rate to 1.00%, most likely at the next meeting in May,” he said.

While judging inflation expectations to be well-anchored right now, the majority of the committee said they raised rates to reduce the risk that recent trends in pay growth and prices will become embedded in expectations.

Businesses surveyed by the BoE expect to raise pay by 4% -6% this year, compared to 2.5% -3.5% in 2021.

The BoE said Russia’s invasion of Ukraine was likely to cause global inflation pressures to strengthen considerably in the coming months and add to supply chain disruptions.