The Bank of England has raised interest rates by a quarter of a percentage point to 4.25% in response to higher than expected UK inflation and signs that Britain’s economy is holding up better than feared. In a fortnight of heightened unease across global financial markets, the Bank’s monetary policy committee (MPC) voted by a majority of seven to two to increase the base rate for the 11th time in a row. It came after an unexpected jump in the UK inflation rate in February to 10.4%, from 10.1% in January, fuelled by food prices increasing at the fastest pace in 45 years. The Bank’s official target for inflation is 2%. The pound rose against the dollar as financial markets moved to anticipate one more quarter-point increase at the MPC’s next meeting in May. However, economists said a 12th and final rate increase to 4.5% hung in the balance amid signs that inflation would fall sharply over the coming months. Rates have now risen by 4.15 percentage points since December 2021, the most aggressive tightening of UK monetary policy for decades. Threadneedle Street left open the option of a further rate increase, but said it would only take action if there were signs of “persistent pressures” from inflation. Andrew Bailey, the Bank’s governor, said there were signs that the price spiral was “peaking”, telling broadcasters: “But of course it’s far too high. We think it’s going to come down sharply, really from the early summer onwards. But we haven’t seen that happen yet.” In an upbeat assessment, the Bank said it was no longer forecasting a technical recession, whereby the economy shrinks for two consecutive quarters. UK gross domestic product (GDP) was now probably on track to grow slightly in the second quarter of the year, after a previous forecast of a 0.4% drop in activity. “Back at the beginning of February, we were really on a bit of a knife-edge as to whether there would be a recession. Certainly, we thought the economy would be quite stagnant,” Bailey said. “It’s not off to the races, let’s be clear. But I’m a bit more optimistic.” Central banks on both sides of the Atlantic have pushed ahead with rate increases despite fears over the collapse of Silicon Valley Bank and the Swiss-government brokered rescue of Credit Suisse by its rival lender UBS. The US Federal Reserve raised its benchmark interest rate on Wednesday by a quarter of a percentage point to a range of 4.75%-5%. The Bank of England said it was closely monitoring the economic effect of the turbulence in the banking industry, adding that it would issue a full assessment in its next update on the economy in May. Bailey said he did not believe the global economy was facing a repeat of the 2008 financial crisis, adding that he was confident the banks in the UK were in a much stronger position than 15 years ago. Economists have said the turmoil in the global banking system has potential to further weigh on the UK economy, reducing the need for further interest rate rises at a time when headline inflation is already expected to fall sharply. Two of the MPC’s external members, Silvana Tenreyro and Swati Dhingra, voted against a rate rise, saying higher borrowing costs were weighing on the economy in a way that could bring forward the point at which rate cuts would be required. David Blanchflower, a former member of the MPC, said the rise was a “disastrous error” that could contribute to a recession. “If you look at the Bank’s own forecasts, with what I’ve just said is [a] huge tightening in financial conditions around the world, they should be cutting rates,” he told the BBC. “So this is a big incoherence. And the problem is going to be, the data is going to actually swamp them, and I think what you’re going to see is rapid U-turns.” It comes amid signs that an acceleration in wage growth since the Covid pandemic has come to a halt in recent months, despite continuing signs of labour shortages in several sectors of the economy. The Bank said measures taken by the chancellor, Jeremy Hunt, in last week’s spring budget could help to grow the economy by about 0.3% over the coming years, while limiting short-term inflation. The extension of the government’s energy price cap at £2,500 for an average household bill is expected to lower inflation by about one percentage point, while freezing fuel duty would contribute a further third of a percentage point drop compared with its previous estimates. Economists said a further rate increase from the Bank in May was not yet a certainty, as it could potentially hold back from pushing up borrowing costs for a 12th time if inflation falls as expected. It came after a sharp drop in global energy prices over recent months, and as the impact of the initial surge in prices after Russia’s invasion of Ukraine a year ago dropped out of the annual inflation figures. “Assuming these trends continue, then we think a pause [in rate hikes] in May is likely,” said James Smith, an economist at the Dutch bank ING. “That’s also partly dependent on banking sector stability and, like its peers overseas, the BoE will keep reiterating that it has separate tools that are better suited to maintaining financial stability.” .