Commenting on today’s 0.25% interest rate rise from the Bank of England, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“Yesterday’s upside inflation surprise, alongside an economy that has shown surprising resilience recently, will have emboldened the Bank of England to raise rates 0.25% p.a. today, to 4.25% p.a.  February’s inflation figures revealed headline inflation rose to 10.4% year-on-year while core inflation, which excludes volatile energy and food prices, rose to 6.2% year-on-year. Market expectations of interest rates have fallen sharply recently on the back of concerns around the banking sector on both sides of the Atlantic, but markets were still pricing a more than even chance of a 0.25% p.a. rise.

“While most forecasts expect inflation to decline reasonably sharply this year, notwithstanding yesterday’s upside surprise and the likely tightening in bank credit standards following weakness in the sector, may mean central bank’s will have less of the leg work to do, there are still ample reasons for the BoE to have raised rates. A tight labour market, which is seeing year-on-year wage growth of 6.5%, is maintaining pressure on core services inflation, which in turn is keeping central bankers nervous of the possibility that a self-fulfilling wage-price spiral takes hold. Furthermore, central banks have sufficient tools to provide liquidity to the financial system to ensure financial stability, whilst still raising interest rates to rein in excess demand.

"However, markets suggest the BoE are close to the end of their tightening cycle, which does not seem unreasonable.”