The Bank of England raised its key interest rate by a bigger-than-expected half-point on Thursday. It didn’t follow the Federal Reserve’s move to stay put for the meeting while waiting for more data.
Most economists had expected a quarter-point move. It was the 13th consecutive increase after starting December 2021 with rates close to zero, and the highest since 2008 at 5%.
The central bank has warned that borrowing costs may rise further. The UK is coping with the worst inflation among the Group of Seven countries. The annualized rate of price gains was 8.7% in May, more than four times the BOE’s 2% target. By comparison, the US inflation rate is around 4%.
This gap explains why the UK cannot replicate the central bank. Not only has core inflation fallen more slowly than expected, services inflation is still rising and wage gains are accelerating. This raises concerns that inflation is becoming embedded in the economy, and adds to the urgency of the central bank’s mandatory action.
“Inflation is still high and we have to deal with it,” BOE Governor Andrew Bailey said in a statement. “If we don’t raise rates now, it will be worse later.”
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None of the rate-setting monetary policy committees actually voted for the expected quarter-point hike. Seven members expressed their support The large half-point move favored keeping both interest rates unchanged. The pound was little changed against the dollar after the decision.
“There were significant reversals in the latest data, indicating greater stability in the inflationary process,” the BOE said in the minutes of the meeting. “If there is evidence of continued pressures, further tightening of monetary policy will be required.”
Like the Fed, the BOE has warned that past interest rate hikes will take time to have their full effect. This is particularly true in the UK, where a significant number of homeowners with a mortgage will refinance immediately. Many two- to five-year low-rate contracts entered into before rates began to rise are coming up for renewal.
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“Expect more mortgage market chaos after this big bazooka rate hike,” said Gary Smith, a partner at financial planners Evelyn Partners. “The repricing of home loans now looks very dramatic and sustained.”
Separately, central banks in Switzerland and Norway also raised interest rates on Thursday. Norges Bank delivered a larger-than-expected half-point move and plans to raise rates again in August.
Write to Brian Swint at [email protected]
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