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Bank of England to Weigh a Rate Increase After a Jump in Inflation

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The Bank of England is set to announce its latest interest rate decision on Thursday, with investors expecting a quarter-point raise, just a day after data showed that Britain’s inflation rate unexpectedly increased last month.

Consumer prices rose 10.4 percent in February from a year earlier, up from 10.1 percent the month before, ending a three-month downward trend and stubbornly keeping inflation in the double digits, according to data from the Office for National Statistics published on Wednesday.

The Bank of England’s policy decision comes amid a period of heightening tension for central banks as turmoil in the U.S. banking system has created the sense that policymakers on both sides of the Atlantic are battling two opposing risks: that inflation will remain persistent and need to be tackled with higher interest rates, and that higher rates will worsen the turmoil in the banking sector. On Wednesday, the U.S. Federal Reserve raised interest rates by a quarter-point and implied it would carry out just one more rate increase this year.

Since December 2021, the Bank of England’s policymakers have raised interest rates at 10 consecutive meetings, reaching 4 percent in an effort to stamp out the threat of persistently high inflation. At last month’s meeting, they indicated that future interest rate increases weren’t a given, arguing that they would respond to signs of inflation being embedded in the economy, but they softened the language previously used.

The shift in tone led some analysts and investors to predict that the central bank might hold rates steady as soon as this month. The Bank of England was forecasting that inflation would drop to about 4 percent by the end of the year, while the economy was expected to be weak and less likely to stoke inflationary pressures, with consumers restrained by rising mortgage costs and lagging wage growth.

Andrew Bailey, the governor of the central bank, told reporters after last month’s meeting that there had been a “turning of the corner” on inflation but warned “it’s very early days, and the risks are very large.”

To some extent, those risks materialized in the surprising upturn in Wednesday’s data, which showed food prices rising at their fastest pace in 45 years and a measure of services inflation increasing. The minutes of this week’s policy meeting may suggest how the Bank of England will react to the uncertain, and potentially bumpy, path ahead on inflation.

The nine-person rate-setting committee has been divided for months on rate increases. At the past two meetings, two policymakers, Swati Dhingra and Silvana Tenreyro, have voted to hold rates steady, arguing that the full effects of higher interest rates were yet to be seen, and so the bank’s monetary policy stance was already set to push inflation below the 2 percent target.

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