On Thursday, the Bank of England raised its key interest rate by half a point more than expected. It did not follow the Fed’s decision to stand still for the meeting while it waited for more data.
Most economists expected a quarter-point move. It is the thirteenth consecutive increase after it started with rates close to zero in December 2021 and reached the benchmark index at 5%, the highest level since 2008.
The central bank warned that borrowing costs may need to rise further. The UK is dealing with the worst inflation among the G7 countries. The annual rate of price gains held at 8.7% in May, more than four times higher than the Bank of England’s target of 2%. In comparison, the inflation rate in the United States is around 4%.
The gap explains why the UK cannot imitate the Fed. Not only has headline inflation declined more slowly than expected, service inflation is still rising and wage gains are accelerating. This raises concerns that inflation is becoming an integral part of the economy, adding to the urgency of tough action from the central bank.
“Inflation remains very high and we have to deal with it,” Bank of England Governor Andrew Bailey said in a statement. “If we don’t raise interest rates now, it could be worse later.”
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None of the monetary policy committee that actually sets interest rates voted to raise the quarter-point rate that had been expected. Seven members endorsed A half point larger move, while two were in favor of keeping interest rates unchanged. The pound sterling did not change much against the dollar after the decision.
““There was significant bullish news in the recent data that indicated further persistence in the inflation process,” the BoE said in the meeting minutes. “If there is evidence of more sustained pressures, further monetary policy tightening will be required.”
Like the Fed, the Bank of England has also warned that past interest rate increases take time to take their full effect. This is particularly true in the UK, where a large number of homeowners who have a mortgage will soon be refinancing. Many of the lower-priced two- to five-year deals that were struck before prices started to rise are on the way for renewal.
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“We expect more chaos in the mortgage market after this bazooka rate hike,” said Gary Smith, partner at financial planners Evelyn Partners. “It appears that the repricing of home loans will now be more dramatic and prolonged.”
Separately, the central banks of Switzerland and Norway raised interest rates on Thursday. The Bank of Norway made a larger-than-expected move of half a point and said it plans to raise interest rates again in August.
Write to Brian Swint at [email protected]
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