LONDON: The Bank of England (BoE) raised interest rates again yesterday in a bid to stop fast-rising inflation becoming entrenched, but it softened its language on the need for more increases as households face a huge hit from soaring energy bills.
Eight of the nine Monetary Policy Committee (MPC) members voted to raise the Bank Rate to 0.75% from 0.5%, taking the benchmark for UK borrowing costs back to its pre-pandemic level.
BoE deputy governor Jon Cunliffe was the sole advocate of keeping rates on hold, warning of a big hit to demand from higher commodity prices.
The British central bank has now raised rates at three consecutive meetings for the first time since 1997.
The BoE said inflation was set to reach around 8% in April – almost a percentage point more than it forecast last month and four times its 2% target – and warned it could peak even higher later in the year.
Soaring energy bills, driven up by the conflict in Ukraine, meant the pressure on British household budgets was likely to be much bigger than the record 30-year squeeze which the BoE predicted last month.
Reflecting worries about the outlook for growth, policymakers yesterday pushed back against investors’ bets that Bank Rate will rise sharply to around 2% by the end of this year, toning down its language on the need for more increases.
“The Committee judged that some further modest tightening might be appropriate in the coming months, but there were risks on both sides of that judgement depending on how medium-term prospects evolved,” the BoE said.
Last month the MPC said further modest tightening “is likely to be appropriate”.
The pound slumped almost a cent against the dollar and British government bond prices jumped as investors trimmed their bets that the BoE would raise rates rapidly this year.
“Regarding inflation, the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices,“ the BoE said in a statement.
“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly.”
The bank said global inflationary pressures would “strengthen considerably further” over the coming months, meaning that net energy importers including Britain would likely experience slowing growth.
The latest official data showed that UK annual inflation hit 5.5% in January, the highest level since 1992.
The UK’s February inflation data is due next Wednesday.
This coincides with a budget update from the government, which is facing higher repayment costs on its vast pandemic bill following rate increases.
Finance minister Rishi Sunak has already announced a major tax increase starting in April on UK workers and businesses.
That same month, a cap on domestic gas and electricity bills is set to significantly increase.
While Britain’s unemployment rate has fallen to its pre-pandemic level, wages are eroding at the fastest pace in eight years as prices soar.
“UK consumers now face an annus horribilis, as rising borrowing costs will be compounded by higher food and energy bills, and tax rises to boot,” said AJ Bell analyst Laith Khalaf. – Reuters, AFP
