The Bank of England raised interest rates by a quarter of a percentage point Thursday, hiking the cost of borrowing for the twelfth consecutive time as it battles inflation above 10%.
The decision takes the main borrowing rate for commercial banks in the United Kingdom to 4.5%, the highest since October 2008. It comes a week after the US Federal Reserve and the European Central Bank also raised rates by a quarter-point.
The Bank of England was the world’s first major central bank to raise interest rates after the pandemic in December 2021, but inflation has remained stubbornly high in the United Kingdom due to soaring food and energy prices, and a tight jobs market.
“The [monetary policy] committee has voted to increase bank rate by 0.25 percentage points, to 4.5%, at this meeting. In doing so, the MPC is continuing to address the risk of more persistent strength in domestic price and wage setting,” the Bank of England said in a statement.
Data last month showed the annual rate of inflation fell to 10.1% in March, from 10.4% in February, still far higher than in the United States and Europe.
Food prices jumped 19.2% on the previous year — the biggest increase in more than 45 years — as the price of bread and cereals rose at a record clip.
Meanwhile, year-on-year growth in regular pay, which excludes bonuses, was 6.6% in the three months to February 2023, ONS data showed. UK wage growth, which is also higher than in the United States and Europe, has added to the inflation problem, even though pay rises have not kept pace with surging prices.
The Bank of England’s job is made more difficult by the fact that the UK economy is expected to shrink this year. That’s because interest rate hikes are a drag on the economy as they make loans and mortgages more expensive, weighing on spending by businesses and consumers.
UK gross domestic product is expected to shrink by 0.3% this year, in what would be the worst performance of any major developed economy, according to the International Monetary Fund.
— This is a developing story and will be updated.