The British central bank has increased its key interest rate by half a percentage point to 1.75 percent. Since the Bank of England (BoE) gained independence in 1997, interest rates have not been increased so much. The monetary policy committee voted in favor of the rate hike with a clear majority of eight to one. The pound weakened after the interest rate decision. The UK currency fell to a daily low.
In Great Britain, the central bank has long been under pressure to curb rampant inflation. The inflation rate had recently risen to 9.4 percent, it is the highest value in 40 years. The target is two percent inflation.
Inflation expected at 13 percent
The markets had expected a significant increase. The monetary watchdogs in London had gradually raised interest rates since December 2021, but only in small increments. "It may seem surprising from the point of view of an observer at the ECB, but the Bank of England is facing public criticism in the United Kingdom for a monetary policy course that is perceived as too expansive," says LBBW analyst Dirk Chlench. The central bank had already switched to a rate hike path in December 2021 and thus earlier than other central banks in large countries.
According to experts, the surge in inflation in the United Kingdom is likely to last longer than in many other economies. The country's exit from the European Union also plays a role, which affects trade, among other things. The Bank of England expects consumer prices to rise further in the coming months. Price hikes are believed to push inflation even further to around 13 percent in the fourth quarter, the central bank's report released today said.
Recession expected in fourth quarter
The monetary authorities believe that the UK is likely to slip into recession in the fourth quarter of this year. Unemployment could also rise from next year.
Financial markets were prepared for the BoE to follow the lead of the European Central Bank (ECB). This recently initiated its interest rate turnaround with a big step and also increased the key interest rate by 0.5 percent.
Central banks worldwide under pressure
Central banks around the world are under pressure to curb high inflation rates, which are currently being driven by skyrocketing energy costs and supply chain problems. The US Federal Reserve (Fed) has raised its key interest rate by 0.75 percentage points for the second time in a row.
Higher prices for commodities and tradable goods would put upward pressure on global consumer prices, the Bank of England report said. However, the forecasts for global inflation and economic viability are associated with considerable risks and depend above all on how geopolitical tensions develop.