The Bank of England raised interest rates for the third time in a row on Thursday, but struck a more cautious tone as the Russia-Ukraine conflict is expected to keep inflation high for longer.
The Monetary Policy Committee voted to raise the Bank Rate 0.25 percentage point to 0.75%.
The U.K.'s inflation was already running at a 30-year high prior to Russia's invasion of Ukraine, which will exert more upward pressure on the central bank's inflation projections.
At its last meeting in February, the Monetar y Policy Committee imposed back-to-back interest rate hikes for the first time since 2004 and raised its forecast for inflation to a 7.25% peak in April, against a backdrop of strong growth and a robust labor market in the U.K
The Bank said at the time that any further tightening of monetary policy would depend on the medium-term prospects for inflation, which were propelled upward by Moscow's assault on Ukraine and subsequent threats to energy supply.
The Bank said in Thursday's report that global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow.
The Bank expects inflation to increase to 8% in the second quarter of 2022, and possibly even higher later in the year.
The risks of further monetary policy tightening are two-sided depending on the development of medium, given the tightness of the labor market and persistent domestic cost and price pressures.
The euro gained against the pound after the announcement, while sterling retreated against the dollar.
Paul Craig, portfolio manager at Quilter Investors, said that a double-digit inflation rate is not off the cards.
The BoE had to keep raising rates. Craig said that it is looking to build in some insurance now if there is a downturn in economic growth or employment.
With global risks and the Russia-Ukraine war having a significant economic impact, the Bank may need to reverse course later in the year.
The Bank will need to continue its tightening path in order to prevent a further devaluation of sterling, which would make it harder for people to make ends meet.
Saving rates could improve from here, which might offset some of the cost of living crunch, but with inflation proving difficult to contain it might all be a little too late.
The country's strong economic rebound is no longer necessary, with policy rates normalized to their pre-pandemic levels and the end of quantitative easing made sense, according to the U.K. chief investment strategist at BlackRock Investment Institute.
The U.K. economy grew by 7.5% in 2021, clawing back much of its contraction during the PAIN era.
The economy could be slowed later this year by the Ukraine war and higher energy prices.
The base rate is expected to be close to 2% by the end of the year, which is higher than before the war began.
Paul thinks that there is excessive hawkishness in most developed markets since hiking from central banks would hurt growth.
The risk of overtightening is shown by the current market pricing that points to a front-load of rate hikes.
Clear communication is important for the Bank to avoid creating confusion and hurting the real economy.
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