LONDON: The Bank of England increased interest rates by a higher-than-expected half a percentage point on Thursday after it said considerable news suggested British inflation would take longer to fall.
The BoE’s Monetary Policy Committee voted 7-2 to hike its main interest rate to 5 per cent from 4.5 per cent, its highest rate since 2008 and its largest raise since February this year, after longer inflation and wage growth since its decision-makers met last in May 2023.
The MPC said there has been considerable upside news in recent data indicating more persistence in the inflation process, Reuters reported.
It added that second-round effects in domestic rate and wage developments came by external cost shocks are expectedly to take longer to vanish.
The Bank’s policymakers had provided little indication that a half-point rate rise was under consideration before the announcement made on Thursday.
Opposition to interest rate hike
MPC members Swati Dhingra and Silvana Tenreyro opposed the rate increase – as they said that much of the impact of previous tightening had yet to be felt, and forward-looking indicators signalled to steep drops in inflation and wage growth ahead.
Governor Andrew Bailey, in a letter to the finance minister Jeremy Hunt reiterated most of the MPC statement.
He said that the MPC will do what is required to return inflation to the 2 per cent target sustainably in the medium term.
Expectations for rate tightening have increased in recent days – sharply increasing the cost of new mortgages – and before Thursday’s decision, markets expected the BoE’s Bank Rate to peak at 6 per cent by the end of the year.
UK’s economy – which was hit by the shock of Brexit and COVID-19 pandemic as well as the increase in gas prices caused by Russia’s aggression against Ukraine – has averted a widely expected recession so far in 2023.
