The Bank of England continues to take it slow with interest rates despite the Federal Reserve’s aggression

Given America’s aggressive 0.75% move, debate is going to focus on whether Britain should have moved harder and faster, writes James Moore

The Bank of England has raised UK interest rates to 1.25 per cent (Reuters)

Two talking points arise from the Bank of England’s latest move on interest rates, which saw them increase by a quarter-point to 1.25 per cent, their highest level in more than a decade.

The first is the economic one and we’ll cover that first. The second (which we’ll get to) will probably get you good and riled up.

It was widely expected that the Bank’s monetary policy committee (MPC) would impose a rise, but given the US Federal Reserve’s aggressive 0.75 per cent move on Wednesday, debate is inevitably going to focus on whether Britain’s central bank should have moved harder and faster.

I confess to being somewhat surprised that it didn’t go for 0.5 per cent, particularly in the wake of the US move, the apparently coordinated international monetary tightening that we’ve been witnessing and the need to send a message.

The MPC would not have – in theory – known of the Fed’s decision before it held its own vote, but its members will have been well aware of what was in the wind.

They will have seen The Wall Street Journal report of a “likely” 75 basis point (bp) move in US rates. The Journal just doesn’t run that sort of story unless it is very sure of its sources. The ground was clearly being prepared.

This morning the Swiss central bank also increased its rates by 50bps.

The MPC, nonetheless, declined the opportunity to follow suit with a bold move of its own, keeping its increase to the more incremental 0.25 per cent rise it has historically preferred.

Three of the nine members held out for a 0.5 point rise, as they did last time, but the hawks found no new allies.

This will likely be the subject of continuing debate. The heat of that discussion will depend on how bad inflation gets. The Bank now has it peaking at a very nasty looking 11 per cent, primarily thanks to the expected rise in the fuel price cap later this year.

But its critics, who have been finding their voices of late, will have taken note of the way core inflation (excluding energy) has been rising. It is higher in the UK than in either the US or the eurozone.

Price rises are being felt across the service sector, by far the biggest part of the UK economy. Wage rises are undershooting inflation, but they have been trending higher as companies battle to find and/or hold on to staff in a labour market that remains very tight.

The MPC is really in a horrible bind because it is having to hike rates at a time when the economy is weak, even if it isn’t quite ready to predict a recession. And it has no power to influence energy prices.

While the MPC expects GDP to contract over the second quarter as a whole – and the data so far bears that out – it still expects to see some level of growth in the third.

It doesn’t want to be in the position of strangling that.

It says it will be prepared to “act forcefully” to head off the danger of inflation becoming entrenched. How forcefully remains to be seen. But the hawks’ case is only getting stronger.

The impact on consumers will, at least, be relatively limited. Roughly four-fifths of mortgage holders are on fixed-price deals. It’s a different matter for prospective buyers, who are already grappling with sky-high prices, and for those on base rate tracking mortgages.

It ought to be good for savers, but the banks have always been faster to increase rates for borrowers than they have for their depositors. That is what should rile people up.

Jeffries, a broker, predicted banks’ profits will benefit. Its estimates range from a 2.8 per cent boost (for HSBC) to a whopping 8.6 per cent (for NatWest) at the pre-tax level.

Lenders will have to deal with a higher level of loan losses. Their regulator has been calling on them to play nice with struggling borrowers, who are rising in number. But this is all still very good news for their margins.

A raft of bumper results being reported in the financial pages, after recent reports of handsome bonuses for bankers, will be consumed through gritted teeth by many Britons and no wonder.

The banks should have a care. We’ve already seen one windfall tax. It isn’t inconceivable that we will be hearing calls for another if they push their luck.