The Bank of England has followed the European Central Bank in raising interest rates by 0.5 points, its largest increase for 27 years.
The UK central bank's Monetary Policy Committee voted by an eight to one margin to increase the bank rate from 1.25% to 1.75%, or its highest level since late 2008, as part of efforts to curb inflation, which is now set to top 13%.
"Returning inflation to the 2% target remains our absolute priority. There are no ifs and buts about that," Bank of England governor Andrew Bailey said.
Bailey said had "huge sympathy" for stretched households who feel that rising interest rates will make life harder. "I'm afraid the alternative is even worse, in terms of persistent inflation," he added.
The Bank of England warned that Britain is now facing a recession with an expected fall in output of 2.1%, although it will not be as severe as the hit from Covid-19 and the global financial crisis.
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It warned that the UK economy would begin to shrink in the fourth quarter of 2022 and contract throughout 2023 in what would be the country's longest recession since the crash.
Consumer price inflation, estimated at around 9.6% in Ireland, is now expected to peak in the UK at 13.3% in October due to surging energy prices following Russia's invasion of Ukraine, and British households are now facing two successive years of declining disposable income.
"The Bank of England is playing catch up after some bumper rate rises from the ECB and Federal Reserve in the last month," said Nicholas Hyett, investment analyst at Wealth Club.
"The resulting rate hike may be the largest in nearly 30 years, but it was also widely expected, and the market reaction has been modest. Instead, the real focus today is on how much further the bank is willing to go as it seeks to bring inflation back down to its 2% target.
"The current inflationary spike is being driven by global food and energy prices, and higher interest rates in the UK will do little to alleviate those pressures. Stronger sterling has the potential to provide some relief.
"However, rising rates in the US and Europe mean the BoEs actions haven’t helped the pound much, and sterling is currently trading near its weakest level against the dollar in over 40 years. The risk now is that higher interest rates start to squeeze consumer and commercial borrowers too much, strangling the life out of the economy without significantly easing the cost-of-living crisis.
"Markets still think the Bank has a rate rise or two in the tank, but to some degree UK monetary policy is now caught in global forces over which the Bank has little control. Inflation will rise or fall according to what happens in Ukraine not Threadneedle Street, and rate decisions are dictated by moves at other central banks as much as by the MPC.”
(Pic: Getty Images)
