Chancellor Jeremy Hunt has stressed the government wants interest rate rises to be kept as low as possible.
Reacting to news of the latest increase to interest rates, Hunt said: “Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country.
“That is why this government’s number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.”
“Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine.”
Unsurprisingly, shadow chancellor Rachel Reeves took a different line, telling prime minister Rishi Sunak to “face up to his mistakes” that have led to the “vicious cycle of stagnation”.
Reeves said: “Families now face higher mortgages and more anxiety after months of economic chaos.”
“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of our economy, and left us exposed to shocks, lurching from crisis to crisis with falling living standards and low growth."
The 75bp interest rate rise was broadly in line with market expectations and Hugh Gimber at JP Morgan Asset Management said the bank had little choice.
“Such a large hike may appear unwarranted given signs that UK activity is already contracting, but there is scant evidence as yet that the slowdown is sufficient to tame inflation.“
He felt “a more modest hike today, when inflation is pushing further into double digits and following strong action from both the Federal Reserve and the European Central Bank, would have risked reigniting questions about the Bank’s credibility and further volatility in sterling markets“.
George Lagarias, chief economist at Mazars suggested raising rates was a risky move, pointing out the UK economy is forecast to be one of the weakest in Europe.
“Hiking rates so sharply is a risky move for a slowing economy which is already projected to go into recession next year,” he commented.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, highlighted the more dovish nature of the Bank’s comments regarding future rate moves.
“The dovish split in the rate hike vote, the softer guidance around future hikes, and the MPC’s new forecasts showing inflation undershooting the 2% target in the medium term, all suggest that the Committee is nearing the end of its tightening cycle,” he said.
He suggested: “These forecasts imply that the MPC thinks the Bank Rate needs to rise by only about 50bp further in order for inflation to hit the 2% target.”
Neil Wilson at markets.com also noted the dovish comments but feels there is further to go with regard to rate increases.
“We got the Dumbo (Dovish jumbo) hike from the Bank of England but they are not saying this will be repeated. “
“In fact, consistent with the Broadbent comments a week or so ago we had a strong pushback against the market implied terminal rate.”
“I think the BoE will need to catch up and do more than it says, but it is trying to bring the market down a peg or two. Don’t think sterling can fly much on this,” he commented.
Joshua Raymond, director at online investment platform XTB.com said: "Investors are disappointed not necessarily in this hike alone but the guidance from the central bank that rates won't need to rise much further to contain higher inflation.”
"We should remember that the market has long deemed the Bank of England's response to inflation far too slow and too weak. The new guidance is likely to be seen as a return to that interpretation.”
“And the troubling part is, should the BoE be correct and not need to hike rates much further, it's more likely to do with the severity of the recession the Bank itself says the UK is already in. That's also bad news for the pound,” he commented.