Today, the Bank of England’s Monetary Policy Committee has voted to raise interest rates to 1.25%. This announcement was at the lower end of consensus expectations that had been split between expecting a 0.25% or a 0.50% increase.

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The vote was 6 to 3 with dissenters preferring the higher 0.50% increase. Dissenters judged that monetary policy should “lean strongly” against inflation risks and that a faster pace of policy tightening was required. The statement was relatively hawkish compared to the last meeting: it added that the Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.

We heard a similar, albeit more direct rhetoric from the Federal Reserve yesterday, with Chair Powell backing up his previous comments that the Federal Open Market Committee (FOMC) has the ‘resolve’ to defeat inflation even if that led to increased recession risk in the US. The FOMC raised its policy rate by 0.75%.

The meeting minutes make for an interesting read, revealing much of the Monetary Policy Committee’s (MPC) rather hopeful expectations for its future policy trajectory;

• MPC members noted that the trajectory of economic activity was not materially different from that incorporated into May’s Inflation Report projections
• The Chancellor’s announcements regarding fiscal support to offset the cost of living crisis are going to be incorporated into updated projections in August – it is expected that there will be a uplift to both growth (0.3 pct pts) and inflation (0.1 pct pts) from these recent initiatives
• Indeed, risks to the present inflation outlook are characterized as “skewed to the upside”

Looking ahead, the BoE still has plenty of work to do in order to tame inflation which, by its own expectations, will peak at around 11% later on this year. But, nevertheless, in staying with a rather moderate pace of policy tightening now, the BoE is staying mindful of the consequential damage that higher interest rates could inflict on the UK economy. UK economic activity is already subject to multiple headwinds. The MPC describe the most recent set of economic statistics in the UK as ‘mixed’.

There is however a bigger context playing out in the way that central banks’ policy stances are changing generally; the central bank ‘put’ (i.e. the willingness of central banks to cut policy rates in order to support asset prices) is coming off the table.

Indeed, we perhaps ought to be thinking in terms of a central bank ‘call’ being a better description of policy conditions. We are entering a period when central banks will be willing to limit asset appreciation and economic activity with tighter policy settings in order to tame consumer price inflation.