As Inflation Surges, the Bank of England Raises Interest Rates for the Fifth Time in a Row
The Bank of England raised interest rates for the fifth time in a row on Thursday in an effort to contain rising inflation.
The Monetary Policy Committee voted 6-3 to raise the Bank Rate by 25 basis points to 1.25 percent, with three members calling for a 50 basis point increase to 1.5 percent.
In a statement issued Thursday, the committee stated that it will “take the actions necessary to return inflation to the 2% target sustainably in the medium term,” with the magnitude, speed, and timing of any further rises dependent on the economic outlook and inflationary pressures.
“The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response,” the bank warned.
The pound fell against the dollar early after the news, but quickly recovered to gain 0.4 percent and trading over the $1.22 mark by mid-afternoon.
Policymakers confront the onerous challenge of bringing down consumer prices against a backdrop of sluggish GDP and a fast sinking currency, while the United Kingdom suffers a serious cost of living crisis.
The Bank of England hiked its base rate by 25 basis points to 1% in May, the highest level in 13 years, but cautioned that the British economy risks entering a recession.
Since then, new data reveal that inflation in the United Kingdom reached a 40-year high of 9% in April, as food and energy prices skyrocketed. The Bank of England now forecasts inflation to climb to “slightly above 11%” in October, citing higher forecast household energy prices following a further hike to the United Kingdom’s energy price cap.
Inflation is soaring globally as a result of rising food and energy prices, which have been compounded by the Ukraine war and supply concerns in agricultural commodities. Supply chain disruptions and fluctuations in demand caused by the pandemic have also pushed up tradable goods prices.
However, the MPC recognized in its statement on Thursday that not all of the excess inflationary pressure can be attributed to global events, adding that local variables such as a tight labor market and business pricing strategies have also played a role.
“Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States,” according to the Bank.
The economy unexpectedly contracted by 0.3 percent in April after contracting by 0.1 percent in March, the first back-to-back contractions since April and March 2020, and the OECD predicts that the United Kingdom will be the weakest G-7 economy next year as higher interest rates, tax increases, reduced trade, and spiraling food and energy prices hit households.
The Bank of England’s approach contrasted with the more robust moves taken by the Federal Reserve of the United States on Wednesday and the Swiss National Bank early on Thursday. The Fed raised rates by 75 basis points, the most since 1994, while the SNB raised rates by 50 basis points, which was more than the market expected.
Information from CNBC was used in this report