The BoE raised interest rates to 1.25%, up from 1% in its continued battle to fight inflation in the UK, which it expects to peak at 11% in October.
It was the bank’s fifth consecutive 0.25% rise and takes the interest rate above 1% for the first time in 13 years.
However, many were expecting a more ambitious rise, similar to the 0.75% increase taken by the Federal Reserve, which has taken the federal-funds rate to between 1.5% to 1.75%.
The lower rise has raised concerns that sterling will face stronger competition from the dollar.
Chris Beauchamp, chief market analyst at the trading platform, IG Group, said the BoE looked like “a timid cat next to the Fed’s roar against inflation”.
“Accompanying comments about being prepared to act ‘forcefully’ on inflation will do little when the actual evidence shows the committee remains broadly cautious,” he said. “A 6-3 vote on 25bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more.”
The bank’s caution led many to believe it was only putting off the problem for longer and has many looking towards a larger hike further down the line.
Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, said: “What the members of its Monetary Policy Committee knew when they met today was that the economy is slowing.
“What it had to do today was send a clear message to other price setters in the economy that 10% price hikes are not an acceptable new normal. It had to show it has not gone soft on inflation, or in economic-speak to anchor inflation expectations.”
Ward argued that a 50bps hike would have been more appropriate in sending that signal in the current economic situation.
She warned: “It is possible that by acting cautiously today, it may have to deliver more further down the line.”
Some, however, were more understanding.
Vivek Paul, UK chief investment strategist, BlackRock Investment Institute, argued that the BoE was the earliest of its peers to begin policy normalisation.
“That means the Bank is further along in the journey to get rates to a neutral level”, he said, “and likely to serve as a case study of how central banks will enact monetary policy as recession risks increase.”
He concluded: “We think market expectations of future UK rates will ultimately prove to be overdone. According to the Bank’s own figures, recession is a genuine risk – and recent government initiatives to alleviate the cost-of-living crisis may prove insufficient to offset UK consumer weakness.
“Ultimately, the Bank has less headroom for hikes compared to the US: the neutral rate of interest – that which neither overly stimulates nor restricts economic growth – is lower, and the country’s high debt-to-GDP ratio implies greater sensitivity of debt servicing costs to rate rises.”
AJ Bell’s head of investment analysis Laith Khalaf held a similar view: “The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock and awe tactics being employed across the Atlantic. Despite the UK starting to tighten monetary policy first, interest rates are now higher in the US.
“Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate setting committee to observe more data as it comes in, and fine tune its approach as circumstances dictate.”