LONDON – Bank of England (BoE) to raise interest rates by a larger-than-expected half a percentage point.
The Monetary Policy Committee (MPC) voted 7-2 to increase the main interest rate from 4.5% to 5%, marking the highest rate since 2008 and the largest rate hike since February.
According to Reuters, decision was influenced by recent data suggesting that British inflation would persist for a longer period than previously anticipated.
The MPC stated that there had been significant upside news in recent data, indicating a more persistent inflation process. They also mentioned that second-round effects in domestic price and wage developments resulting from external cost shocks would take longer to unwind than they did to emerge.
While economists polled by Reuters had expected a move to 4.75%, financial markets had indicated a nearly 50% chance of a rise to 5% following higher-than-expected inflation data released the previous day. The rate increase came as a surprise since BoE policymakers had given little indication of considering a half-point rate hike before the announcement.
Two MPC members, Silvana Tenreyro and Swati Dhingra, opposed the rate rise, citing the belief that the impact of previous tightening measures had not fully materialized and that forward-looking indicators pointed to steep declines in inflation and wage growth in the future.
The BoE Governor Andrew Bailey reiterated in a letter to the British finance minister that the MPC would take the necessary measures to sustainably return inflation to the 2% target in the medium term.
The decision to raise interest rates followed similar moves by the European Central Bank, the Swedish central bank, and the Norwegian central bank. While Britain faces challenges in tackling inflation, other central banks around the world are also grappling with inflationary pressures.
The BoE maintained its previous guidance on future policy, stating that if there were evidence of more persistent pressures, further tightening in monetary policy would be required. The central bank also expressed its intention to monitor the impact on mortgage costs and rising costs in Britain’s rental market.
According to last month’s BoE forecasts, Britain’s economy has struggled to fully recover from the impact of Brexit, the COVID-19 pandemic, and the surge in gas prices due to the situation in Ukraine. Growth for this year is expected to be minimal at 0.25%, and inflation is projected to fall to just over 5% by the end of the year, gradually moving below the 2% target in early 2025.