The Bank of England Thursday lifted its key interest rate by a half-point to five percent to tackle stubbornly high UK inflation despite such a move worsening a cost-of-living crisis.
The higher-than-expected hike to a 15-year high was the 13th increase in a row.
“There had been significant upside news in recent data that indicated more persistence in the inflation process,” the Bank of England (BoE) said minutes from a regular policy meeting.
The decision came one day after data showed UK annual inflation remained at 8.7 percent in May, defying expectations of a slowdown.
The UK inflation rate is the highest among G7 rich nations.
Prior to the data, markets had expected a smaller quarter-point increase.
Global hikes
The half-point lift was in stark contrast to the Federal Reserve, which last week pressed pause on US rate hikes after a sharp easing in the country’s inflation.
The European Central Bank last week raised its borrowing costs by a quarter point.
The Swiss and Norwegian central banks hiked their rates on Thursday.
As his Conservative government prepares for a general election next year, British Prime Minister Rishi Sunak has made slowing the rate of price increases a priority.
Analysts predict that UK interest rates will reach 6% by the end of the year, potentially pushing the country into recession.
Sunak hopes to cut inflation to 5% by the end of the year, or roughly half the amount at the start of 2023.
The Bank of England began raising its benchmark interest rate from a record low of 0.1 percent at the end of 2021, as inflation began to rise as economies gradually emerged from Covid lockdowns.
Following Russia’s invasion of Ukraine in early 2022, UK inflation reached a 41-year high of 11.1 percent in October, owing to skyrocketing energy prices.
Core inflation, which excludes food and energy costs, reached 7.1 percent in May, the highest level in more than three decades.
Following the latest Bank of England decision, finance minister Jeremy Hunt defended the need for higher interest rates, even if they exacerbated the cost-of-living crisis.
“Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down,” said the Chancellor of the Exchequer.
Two of the bank’s nine policymakers voted Thursday for no change, arguing that “the energy price shock and other global cost-push shocks” such as surging food prices would continue to reverse this year.
Governor Andrew Bailey voted to hike.
“Bank of England policymakers are feeling the heat… with core inflation increasingly hot and sticky, which is why they’ve opted to super-size the rate hike,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Investors are trying to assess whether today’s big bazooka now, might be enough to stem further rate hikes or whether more will still be necessary.”
Housing turmoil
Commercial lenders tend to match the central bank’s rate moves on their home loans.
As a result, UK mortgage rates and rents are surging, biting deep into disposable incomes while pay rises fail to keep pace with inflation.
The BoE Thursday said that the “full impact” of its 13 rate rises “would not be felt for some time” in the mortgage market.
Policymakers “also recognised that it had become more important to consider developments in the rental market”.
The BoE hikes have also sent the UK government’s long-term borrowing costs soaring.
However, those who can afford to save benefit from increased fixed returns on investments.
The central bank is tasked by the government to keep UK annual inflation close to a target of two percent.
Thursday’s move brings its rate to the highest level since the 2008 financial crisis.
