Bank of England boosts interest rate to 13-year high as inflation soars

Policy makers led by Governor Andrew Bailey hinted that they may join a growing global trend for larger hikes if inflation continues to soar


The Bank of England raised interest rates for a fifth straight meeting, placing them at the highest in 13 years, and sent its strongest signal yet that it’s prepared to unleash larger moves if needed to tame inflation. The nine-member Monetary Policy Committee voted 6-3 to increase the benchmark lending rate by 25 basis points to 1.25 per cent. A minority of officials maintained their push for a move of double that size.

Policy makers led by Governor Andrew Bailey hinted that they may join a growing global trend for larger hikes if inflation continues to soar, saying “it would be particularly alert to indications of more persistent inflationary pressures, and would if necessary act forcefully in response.”

Crucially, that language was endorsed by all the BOE’s voters, a departure from May when two declined to sign up to guidance that more hikes were needed.

The bank also raised its forecast for the peak of inflation this year to “slightly above” 11 per cent, reflecting the planned increase in the energy price cap in October, and said it now expects the economy to contract in the current quarter.

Investors raised their bets for further rate increases this year, pricing in a 3 per cent base rate by the end of the year. That would likely require three half-point rate increases and a further quarter-point one at the remaining four meetings this year, an unprecidented pace of tightening. Rates stood at just 0.1 per cent as recently as December.

For now though the BOE, which was the first major central bank to hike rates after the pandemic, is moving slower than some of its peers. But while the BOE is grappling with an inflation rate that has already hit a four-decade high of 9 per cent, officials are also concerned about an economic slowdown that is putting the UK at risk of recession.

Rates rise globally amid war, inflation
Nearly four dozen countries have raised interest rates in the last six months, as central banks in the United States, England, India and other nations push borrowing costs higher in a bid to contain the most rapid inflation in decades.
The Federal Reserve on Wednesday drove up its benchmark policy rate — its third increase this year and its biggest since 1994. Brazil and Saudi Arabia were among other countries that announced rate policy changes within hours of the Fed’s move.
On Thursday, the Swiss National Bank raised its policy interest rate for the first time in 15 years in a surprise move, with the Bank of England also hiking the key rate. So far in 2022, 44 countries have lifted rates, the data from FactSet shows, with more moves to come.
Higher rates are powerful tools for fighting rising prices: They make borrowing money more expensive, which weighs on consumer demand and business expansions, in turn cooling economic growth and slowing hiring. That can translate into weaker wage growth for households and less pricing power for companies, eventually pulling down inflation. It is a delicate balancing act, one that puts pressure on policymakers to rein in the economy without sending growth tumbling. Economists and investors see that as an increasingly daunting challenge.
The Fed, led by Chairman Jerome Powell, is poised to continue raising rates this year, most likely at a rapid pace. The European Central Bank has signalled that it will raise rates in July for the first time in 11 years.
The world’s upward march is a big departure from the policy approach following the financial crisis, when central bankers often made increases in fits and starts — if at all.
Before the coronavirus, economists thought that the world might be stuck in a low-rate, low-inflation, slow-growth trap — and many of the world’s economies began to push rates down.
But after the outset of the pandemic, government stimulus spending packages meant to cushion against the economic fallout ended up stoking demand. Supply chains were roiled by factory shutdowns, shipping woes and labour shortages. Combined, those forces revived long-dormant price pressures (NYT).