Why the Bank resisted pressure to fight inflation harder – and what happens next

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Despite a false start last November – when the MPC stunned markets by holding rates at a record low – the Bank was quicker out of the gates than its biggest international peers.

But the US Federal Reserve, the sleeping giant of global monetary policy, has recently awakened from its inflationary slumber. 

The Fed is now raising rates at a far faster pace than the Bank, including a 0.75 percentage point increase on Wednesday. Despite starting from a similar baseline of 0.25pc, versus the Bank’s 0.1pc, the Fed’s funds rate is now at 1.75pc – half a point higher than the Bank Rate.

The rise – which makes it more lucrative for investors to hold dollars – is further strengthening the US currency, which was already being buoyed by its safe-haven credentials as markets sell off in response to global monetary tightening. It is a vicious cycle for the British pound, which has dropped to its lowest levels since the start of lockdowns.

Markets expect the pace to pick up from here, pricing in a series of half point rates at the next three meetings, followed by another two quarter-point climb to take the rate to about 3.25pc next year. Still, criticism of the MPC is building.

 “Although rarely used, the governor’s eyebrows remain part of the Bank of England’s armoury. Since I left in 2013, mine have been resting. But the latest inflation rate of nine per cent led them to rise sharply,” wrote Lord Mervyn King, the Bank’s former Governor, in The Spectator on Thursday.

“Time to have a word with those members of the Monetary Policy Committee who only last year were keen on negative interest rates.”

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