LONDON: The Bank of England (BoE) on Thursday (Dec 15) increased its interest rate by half a point to 3.5%, the highest level in 14 years, in a bid to cool sky-high inflation.
The increase was the BoE’s ninth in a row, while the amount matches an increase on Wednesday by the US Federal Reserve.
“The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response,” the BoE said in a statement following its latest rate call.
The increase was less than in November when it lifted borrowing costs by 0.75 percentage points.
The BoE on Thursday added it expects the UK economy to contract 0.1% in the fourth quarter, better than its previous forecast for a contraction of 0.3%.
The UK government has said the British economy is in a recession that it expects to carry on into next year on fallout from rocketing energy and fuel bills.
BoE governor Andrew Bailey, in a letter to finance minister Jeremy Hunt accompanying the decision, said the BoE’s forecasts suggested British inflation had reached its peak.
Official figures on Wednesday showed consumer price inflation fell to 10.7% in November from 11.1% in October. That 0.4 percentage point fall in the annual rate was the largest since July 2021.
Speaking later to reporters, Bailey said that data gave “the first glimmer” that inflation would fall sharply next year, but said labour market pressures meant it was too soon for the BoE to let down its guard.
“That’s why really we had to raise interest rates today, because we see that risk as really quite pronounced,” he said.
Soaring prices are eroding the value of wages, causing public and private sector workers to go on strike in an attempt to secure higher salaries.
While boosting savers, rising interest rates are increasing loan costs for individuals and businesses.
“To make matters worse, higher mortgage payments will come on top of all the other soaring costs – from food to fuel,” noted Sarah Coles, senior personal finance analyst at stockbroker Hargreaves Lansdown.
UK nurses on Thursday staged an unprecedented one-day strike as a “last resort”, despite warnings it could put patients at risk.
It follows fresh walkouts by railway staff, while planned stoppages by passport control and postal workers spell Christmas misery for millions of Britons.
The BoE began to raise its rate in December last year, when it had stood at a record-low 0.1%.
Paul Dales, chief UK economist at Capital Economics, said on Thursday that he expected the BoE to keep on increasing up to a peak of 4.5% early next year, as inflation remains at historically-high levels.
Some economists now think the BoE could end its programme of rate rises as soon as the first quarter of next year, having now raised nine times since December 2021. – AFP, Reuters
