Bank of England Boosts Rates to 13-Year High as Inflation Expected to Hit Double Digits

A person walks past the Bank of England, in London on Oct. 31, 2021. Tom Nicholson/Reuters

Britain’s central bank has raised its key interest rate to 1 percent, the highest level in 13 years, as policymakers scramble to curb soaring inflation that has risen faster than wages and eroded the purchasing power of many households.

The Bank of England announced on May 5 that its rate-setting Monetary Policy Committee (MPC) voted 6–3 for an increase of 25 basis points, or 0.25 of a percentage point, bringing the benchmark interest rate to a level not seen since 2009.

Three of the nine MPC members voted for an even steeper rate increase of 50 basis points, which would have matched the hefty hike announced by the Federal Reserve a day prior as the U.S. central bank similarly struggles to contain runaway prices.

U.S. consumer prices rose at a pace of 8.5 percent in the year through March, the highest since 1981. In the UK, that rate was 7.0 percent, with inflation hammering economies around the world and putting pressure on central banks to act.

While Fed Chairman Jerome Powell announced at a post-meeting press conference on May 4 that “there is a broad sense on the committee that additional 50-basis-point increases should be on the table at the next couple of meetings,” the Bank of England’s policymakers expressed similar sentiment, saying in a note that “most members of the committee judged that some degree of further tightening in monetary policy might still be appropriate in the coming months.”

“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell said at the press conference.

Britain’s monetary policymakers said in a statement that there’s a risk that “tight labour markets and strong wage growth, coupled with higher inflation expectations, could lead to further inflationary pressures in advanced economies.”

Economists at the Bank of England expect consumer price inflation to continue to climb for the remainder of the year, rising to just over 9 percent in the second quarter of 2022 before peaking at slightly over 10 percent in the final quarter of the year.

Global inflationary pressures, which the MPC said have “intensified sharply following Russia’s invasion of Ukraine,” have led to a “material deterioration in the outlook for world and UK GDP growth.”

The MPC now expects the British economy to contract by 0.25 percent in 2022, compared with a previous forecast of 1.25 percent growth.

The policymaking body also lowered its economic growth forecast for 2023, from 1 percent to 0.25 percent.