The Bank of England hiked interest rates by 50 basis points on Thursday in an effort to tame soaring prices. Inflation rocketed to 9.4% year-on-year in June, and the BoE now expects it to hit 13% by the end of the year. It was the BoE’s biggest rate increase since 1995, and follows similarly big moves from the Fed and ECB. Loading Something is loading.
The Bank of England hiked interest rates by 50 basis points for the first time since 1995 on Thursday as it predicted UK inflation would soar above 13% before the end of the year.
The move by the BoE’s monetary policy committee took the benchmark interest rate to 1.75%, its highest since 2008.
In a report accompanying the decision, the BoE said the outlook had darkened since its last meeting in May, and that it now expects a recession to hit by the end of the year.
The central bank predicted inflation will rise above 13% in the fourth quarter, up from a 40-year high of 9.4% in June, reflecting the surge in natural gas prices following Russia’s supply cuts to Europe. It said inflation would remain at “very elevated levels” in 2023.
“The United Kingdom is now projected to enter recession from the fourth quarter of this year,” the BoE said. “Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
The pound dropped after the decision and was last down more than 0.4% against the dollar at $1.21. London’s FTSE 100 index was up 0.31% as equity markets across Europe rose on Thursday.
The BoE signaled last month that it was weighing up a 50 basis point, or 0.5 percentage point, interest rate hike in August. The central bank normally raises and lowers rates in increments of 25 basis points. February 1995 saw the last 50-point hike.
In the US, the Federal Reserve has carried out two outsized 75 basis point interest rate hikes as it rapidly pushes up borrowing costs to cool inflation.
Economists have said the Fed’s hikes put pressure on other global central banks to follow suit, as they attract money to the US and push up the dollar. That weakens foreign currencies, making other countries’ imports more expensive.
The European Central Bank last month raised interest rates by a bigger-than-expected 50 basis points, taking borrowing costs out of negative territory for the first time since 2014.
“The largest hike in 27 years is the minimum action required by the Bank of England at this stage,” said Seema Shah, chief strategist at Principal Global Investors. “With inflation set to hit 13% later this year and set to remain stubbornly high through next year, the central bank needs to tighten policy at an accelerated pace.”
Shah added: “Unfortunately, policy tightening will inevitably take its toll on the UK economy. Higher mortgage payments and borrowing costs will only add to the awful cost of living crisis, straining household budgets in a way we haven’t witnessed for over 60 years.”
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