The Bank of England (BoE) raised the key interest by a quarter of a percentage point to 1 percent to counter inflation in the UK, likely to rise above 10 percent in Q4 due to high energy prices, which will lead to a contraction in the economy.
The decision came a day after the US Federal Reserve raised interest rates by 0.5 percentage point in its efforts to contain the highest inflation rate recorded in the country in 4 centuries, and the European Central Bank is expected to follow suit.
It also intersected with the British people casting their votes in local elections, the preliminary results of which showed that the Conservative Party led by Prime Minister Boris Johnson suffered losses in the poll, which was held against the background of the cost of living crisis and the fines imposed on the Prime Minister for violating the rules of closure imposed to combat the Coronavirus.
The Bank of England’s move was widely expected, as BoE policy makers voted for the fourth consecutive rate increase since December at a time when millions of UK households struggle with the rising cost of living.
The UK annual inflation rate hit a 30-year high of 7% in March – more than three times the BoE’s target – as food and energy prices continued to rise.
Meanwhile, UK consumer confidence slipped to a level close to a record low in April amid fears of slowing economic growth.
The cost of living for the British registered a further rise in the past weeks after the imposition of an increase in taxes on workers and commercial activities, in addition to the rise in the value of energy bills.
Monetary Policy Committee
The Bank’s Monetary Policy Committee approved a 25 basis point increase by a 6-3 majority, while raising the base interest rate to 1 percent. The bank said that minority members favor an increase in interest rates of 0.5 percentage point to 1.25 percent. Interest is at its highest level since 2009.
The Bank of England declared in the minutes of its meeting that “global inflationary pressures increased in the wake of the Russian invasion of Ukraine” and will be reflected on British households in October with the increase in electricity prices, which will contribute to an increase in inflation to 10 percent in the fourth quarter.
He warned that he expects gross domestic product to contract in the fourth quarter, which partly reflects the expected large rise in household energy bills in October, as well as a 0.25% contraction in the economy in 2023.
Very narrow path
“The point is that we’re on this very narrow path right now,” Bank Governor Andrew Bailey said at a press conference when asked why the bank made its decision to raise interest rates.
Bailey added: “The immediate reason for raising the bank rate at this point is not only the current inflation profile and what is to come and of course what that could mean for upcoming inflation expectations – but the risks as well.”
Energy prices and shutdowns in China are major risk factors.
The BoE chief previously said that the Bank may look to take a more gradual approach to tightening rather than follow the Fed with a 50bp hike.
Sterling pound
The price of the pound fell by more than 2%, to record $1,2362, following the bank’s decision.
“The pound is under pressure as a result of the split following the vote… which indicates increased nervousness over the UK’s economic outlook and risks of a deflation,” Interactive Investor analyst Victoria Scholar told AFP.
With the outbreak of the Covid-19 pandemic beginning in early 2020, the BoE reduced the base interest to 0.1 percent, the lowest rate ever, and pumped huge amounts of money into the economy. It started raising interest rates last December.
