LONDON (AP) – The Bank of England raised interest rates by half a percentage point Thursday as it sought to tame double-digit inflation that is fueling a cost-of-living crisis, public-sector strikes and fears of recession.
The bank’s monetary policy committee voted 7-2 to push its key rate to 4 per cent, approving the 10th consecutive rate increase since a post-pandemic surge in the world economy and Russia’s war in Ukraine drove inflation to 40-year highs.
Economists suggest this may be the last big rate increase for Britain’s central bank after inflation slowed to 10.5 per cent in December from a peak of 11.1 per cent two months earlier. It forecast a fall to about 4 per cent by the end of the year.
“We have done a lot on rates already. The full effect of that is still to come through, but it is too soon to declare victory just yet,” bank Gov. Andrew Bailey said at a news conference. He added, “We have seen a turning of the corner, but it’s very early days and the risks are very large.”
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The bank pointed to high global inflation but said “it is likely to have peaked across many advanced economies, including in the United Kingdom,” noting falling energy prices and fewer supply chain disruptions.
The U.S. Federal Reserve has started tapering its response, boosting its key rate by just a quarter-point Wednesday. The European Central Bank, meanwhile, is expected to go big again Thursday, with economists forecasting a half-point increase.
The Bank of England, which noted more hikes “would be required” if inflation proves more persistent, said its recession forecast is less severe than previously projected. The overall size of the economy will shrink throughout 2023 and the first quarter of 2024 as high energy prices and interest rates crimp spending, the bank said.
“This forecast is consistent with the technical definition of a recession, which is at least two consecutive quarters of falling output,” the bank said. “But this is a much shallower profile for the decline in output than” expected in November.
Optimism grew that rate increases may begin to tail off after UK inflation eased for a second straight month to 10.5 per cent in December, down from a peak of 11.1 per cent in October. That’s still far higher than in the U.S. and the 20-country eurozone, where inflation slowed to 6.5 per cent in December and 8.5 per cent in January, respectively.
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With the cost of food and services rising and wage increases outstripping forecasts, the bank sent the message that it is serious about fighting inflation even as energy prices fall and concerns about sluggish economic growth take centre stage.
“The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far,” the bank said in a statement. “There are considerable uncertainties around the outlook.”
After more than a decade of record-low interest rates, the Bank of England began raising borrowing costs in December 2021, when its key rate stood at just 0.1 per cent. The bank stepped up its fight against inflation last year, approving four big increases of a half-point or more since August to bring the rate to 3.5 per cent.
Inflation soared after Russia’s invasion of Ukraine fueled sharp increases in food and energy prices, leading to the UK’s biggest drop in living standards since the 1950s. That has triggered a wave of strikes – including the biggest day of industrial action in more than a decade on Wednesday – as nurses, train drivers, border guards and teachers demand pay increases.
The government is trying to prevent higher wages from causing a second round of domestically driven inflation that could be more difficult to tame.
Rising prices also are choking off economic growth and squeezing public finances as the government spends billions to help consumers and businesses hit by high energy costs this winter. However, wholesale natural gas prices in Britain are down 75 per cent from their peak in late August, which will translate into lower costs for businesses and consumers in coming months.
The International Monetary Fund this week said that the UK was on track to be the only major economy to shrink this year, even as the outlook for the rest of the world improves. The IMF said the country’s gross domestic product was likely to contract by 0.6 per cent in 2023, compared with a previous forecast of 0.3 per cent growth.
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