Bank of England hikes interest rates to 13-year high, sees inflation hitting 10%

Bank of England hikes interest rates to 13-year high, sees inflation hitting 10%

BOE Governor Andrew Bailey has warned the Bank is walking a “narrow path” between growth and inflation.

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LONDON — The Bank of England on Thursday raised interest rates to their highest level in 13 years in a bid to tackle soaring inflation.

In a widely expected move, policymakers at the BOE voted for a fourth consecutive rate hike since December at a time when millions of U.K. households are grappling with skyrocketing living costs.

The Bank’s Monetary Policy Committee approved a 25-basis point increase by a majority of 6-3, taking the base interest rate up to 1%. The Bank said the members in the minority preferred to increase interest rates by 0.5 percentage points to 1.25%.

Like many central banks around the world, the BOE is tasked with steering the economy through an inflation surge that has been exacerbated by Russia’s unprovoked onslaught in Ukraine.

Annual U.K. inflation hit a 30-year high of 7% in March — more than three times the BOE’s target level — as food and energy prices continue to surge. U.K. consumer confidence, meanwhile, plunged to a near record low in April amid fears of slowing economic growth.

The Bank expects U.K. inflation to rise to roughly 10% this year as a result of the Russia-Ukraine war and lockdowns in China. It has also warned prices are likely to rise faster than income for many people, deepening the cost of living crisis.

“Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine,” the Bank’s MPC said. “This has led to a material deterioration in the outlook for world and UK growth.”

BOE Governor Andrew Bailey had previously warned the Bank is walking a “narrow path” between growth and inflation — and implied that the Bank may look to take a more incremental approach to tightening rather than following the U.S. Federal Reserve with a 50-basis point hike.

The U.S. central bank on Wednesday raised its benchmark interest rate to a target rate range of between 0.75% and 1%. It marked the Fed’s biggest rate hike in two decades and its most aggressive step yet in its fight against a 40-year high in inflation.

Sterling traded down 1.2% at $1.2468 shortly after the BOE’s rate decision. The U.K. currency erased gains from the previous session, falling back toward its lowest level since July last year.

“UK GDP growth is expected to slow sharply over the first half of the forecast period,” the Bank said. “That predominantly reflects the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.”

U.K. gross domestic product is estimated to have risen by 0.9% in the first quarter of the year, the Bank said, noting this was stronger than anticipated in its February report.

The unemployment rate, meanwhile, fell to 3.8% in the three-month period through to February and is slated to fall further in the coming months.

“The combination of slower growth and higher inflation is a challenge for many policymakers, and is reflected in today’s split vote,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.

“However, with inflation set to remain higher for longer in 2022, MPC policy tightening remains in autopilot mode amid concerns over second round effects from tight labour markets,” Mehdi said.

“Looking ahead, energy prices and China lockdowns are key risk factors, but scope for inflation to cool later this year and the impact of a significant household income squeeze on growth could eventually push the bank on a more dovish path,” they added.

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