The Bank of England hiked its bank rate by 25 basis points to 5.75%, whereas the European Central Bank left rates unchanged today. Both central banks remain on guard for further hikes, economists say.

The Bank of England’s Monetary Policy Committee today voted to raise the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.75%.

“In the United Kingdom, output growth has remained firm and appears to be evolving in line with the Committee’s most recent projections. Credit and broad money continue to grow rapidly. The pace of expansion of the world economy remains robust,” it said.

Also, CPI inflation fell back to 2.5% in May, and is expected to moderate further. However, the Bank noted that while pay pressures remain muted, the margin of spare capacity in businesses appears limited and most indicators of pricing pressure remain elevated.

“The Committee judged that, relative to the 2% target, the balance of risks to the outlook for inflation in the medium term continued to lie to the upside. Against that background, it further judged that an increase in Bank Rate of 0.25 percentage points to 5.75% was necessary to meet the 2% target for CPI inflation in the medium term,” it said.

Meanwhile, at its meeting, the Governing Council of the ECB decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.00%, 5.00% and 3.00% respectively.

CIBC World Markets noted that the UK’s rate is now at its highest level in six years. “The accompanying statement says little new about the near-term outlook for policy: the rate hike option seems to remain in place at this stage and this is probably the best strategy given continued concerns about inflation,” it says, adding that there is nothing there suggesting that the Bank will raise rates again next month.

“A tightening mood clearly remains in place at the Bank but as we are now arguably in restrictive territory on the monetary front, we remain of the view that further rate rises may not prove necessary and would present an overshooting,” CIBC concludes.

CIBC says that the ECB also remains in a tightening mood, “and even though the ECB president left a certain degree of uncertainty over a September or October policy action scenario, we have most elements in place to validate our expected September move.”
“In the Q&A session, the ECB President Trichet accepted the current market expectations over a September or October rate move and importantly, even if we do not have an August press conference scheduled, Trichet stressed that he could easily transfer a message at any time or call for a press conference. So all this leaves our September rate hike expected scenario as a credible one,” it said.