Bank of England hikes rates in clamour to contain spiralling inflation

The Bank of England raised interest rates to 0.5% on Thursday and nearly half of its policymakers wanted a bigger increase to contain rampant price pressures, as the central bank warned inflation will soon top 7%.

In a surprise split decision, four of the nine members of the Monetary Policy Committee wanted to raise interest rates by half a percentage point to 0.75%. This would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago.

The majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase.

The move follows hot on the heels of a rate hike in December, marking the first back-to-back increases in Bank Rate since 2004 and reflecting urgency among MPC members to show they are on top of a growing cost-of-living crisis.

The BoE said consumer price inflation – which stood at 5.4% in December – now looks set to peak at around 7.25% in April, which would be the highest rate since the recession-ravaged early 1990s and miles off its 2% target.

Earlier on Thursday, British energy regulators raised the maximum bill for typical household usage by around 700 pounds to nearly 2,000 pounds.

In contrast with the approach taken by the European Central Bank, the BoE warned further “modest tightening” is in the pipeline, even though growth will be hurt by global energy and goods price inflation.

“Given the current tightness of the labour market and continuing signs of greater persistence in domestic cost and price pressures, all members of the Committee judged that an increase in Bank Rate was warranted at this meeting,” the minutes from the BoE’s Feb. 2 meeting said.

High inflation meant that post-tax income for working households would fall by 2% this year and 0.5% next year, while weakening demand would push unemployment up to 5% in three years’ time.

The BoE said it will start to unwind its 895 billion pounds ($1.2 trillion) quantitative easing programme by allowing its vast holding of British government bonds to roll off its balance sheet as they mature, while selling entirely its much smaller stock of corporate bonds.

Price pressures looks set to persist for much longer than forecast in November by the BoE, which trebled its forecast for wage growth this year to 3.75%.

Inflation in a year’s time now looks set to remain above 5% based on the market outlook for interest rates. But in a sign the BoE thinks investors have priced in too many rate hikes in future years, it predicted inflation in three years’ time would come in below target at around 1.6%.

Reuters

For Diaspora Digital Media Updates click on Whatsapp, or Telegram. For eyewitness accounts/ reports/ articles, write to: citizenreports@diasporadigitalmedia.com. Follow us on X (Fomerly Twitter) or Facebook