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Bank of England raises rates, says inflation set to fade

By William Schomberg, David Milliken and Suban Abdulla

LONDON (Reuters) - The Bank of England (BoE) raised interest rates for the 11th time in a row on Thursday, but said a surprise resurgence in inflation would probably fade fast, prompting speculation it had ended its run of hikes.

Sounding more upbeat about the outlook for Britain's sluggish economy but noting the risks posed by turmoil among global banks, the BoE's nine rate-setters voted 7-2 in favour of a 25 basis-point increase in Bank Rate to 4.25%, as expected by economists polled by Reuters.

This rate rise extends a run of increases that began in December 2021, although it was the Monetary Policy Committee's (MPC) smallest increase since June.

Investors priced in one more quarter-point rate hike, probably at the BoE's next meeting on May 11, pushing up sterling moderately against the dollar. But many economists said the central bank might have already reached the end of its tightening cycle.

BoE Governor Andrew Bailey was non-committal when asked about the latest rate rise. "We don't know whether it's going to be the peak," he told broadcasters.

"What I can tell you is that we've seen signs of inflation really peaking now. But of course it's far too high.... We need to see it starting to come down progressively and get back to target."

The BoE - which is trying to reconcile the weak economic outlook and anxieties about global banks with stubborn inflation - repeated a message it gave last month that suggested raising rates was less urgent.

"The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation," the BoE said.

"If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required."

Bailey and his colleagues last month dropped language saying that they were ready to act forcefully on rates if needed.

Gurpreet Gill, a strategist at Goldman Sachs Asset Management, said strong growth in domestically generated inflation - typically higher pay deals - was behind the hike.

"But we continue to see a case for a pause after today given the expected drag on growth from past policy tightening and recent financial market volatility."

In Thursday's statement, the BoE said price growth was on course to fall more sharply than it previously thought in the April-June period, despite data on Wednesday showing a surprise jump in inflation to 10.4% in February.

Some of that increase was due to often volatile clothing prices which could prove less persistent, it said.

Ross Walker, head of global economics at NatWest Markets, said "the MPC does not seem remotely fazed" by Wednesday's inflation surprise and was confident wage pressures would ease.

"The overall tone of the March minutes seems mildly dovish," he said.

The BoE said inflation in the second quarter would be lower than the BoE forecast last month, helped by the government's extension of state subsidies to lower households' utility bills and a fall in international energy prices.

MPC members Swati Dhingra and Silvana Tenreyro again voted to keep rates on hold while Catherine Mann, who has been the panel's strongest advocate for bigger hikes, backed the 25 basis-point rise. (Graphic: BoE's inflation fight continues, https://www.reuters.com/graphics/BRITAIN-BOE/mopakwyzqpa/chart.png)

BANK WORRIES

As recently as Tuesday - before the February inflation data - investors were split 50-50 on whether the BoE would leave Bank Rate unchanged after the rescue of Credit Suisse and the collapse of Silicon Valley Bank.

The BoE noted "large and volatile moves" in global financial markets but said its Financial Policy Committee judged that Britain's banking system was resilient.

"The MPC will continue to monitor closely any effect on the credit conditions faced by households and businesses, and hence the impact on the macroeconomic and inflation outlook," it said.

The European Central Bank last week stuck to its plans and raised rates by 50 basis points despite the turmoil, a move repeated by the Swiss National Bank on Thursday.

On Wednesday, the U.S. Federal Reserve raised its main interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases.

The BoE predicted measures included in Hunt's budget last week would increase the level of gross domestic product by about 0.3% over the coming years.

It predicted GDP would grow slightly in the second quarter, having said in February it was on course to shrink by 0.4%.

As well as the extended energy subsidies to households - which had originally been due to expire in April - the BoE expects stronger employment growth than previously forecast.

The BoE is worried about pay growth, which is running far above its historical average, and that shortages of workers remain acute, both of which are inflationary.

However, it said it expected wages to rise slightly less than it had previously forecast, as inflation expectations fell.

(Additional reporting by Andy Bruce; Writing by William Schomberg; Editing by Catherine Evans and Barbara Lewis)