Bank of England raised borrowing costs Thursday by more than anticipated as it seeks to combat stubbornly high inflation, a move that will hit borrowers hard.
In a statement, the bank said its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a fresh 15-year high of 5%. The increase, which was the bank’s 13th in a row, was somewhat of a surprise, with most economists predicting a smaller quarter-point hike.
The committee warned of further increases to come.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” it said.
Clearly rate-setters have been spooked by the failure of inflation in the U.K. to come down as fast as predicted.
Figures on Wednesday showed U.K. inflation unexpectedly holding steady at 8.7%, fueling concerns over the outlook for prices after predictions for a modest decline to 8.4%.
“There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand,” the panel said.
The rate hike will pile further pressure on borrowers, particularly the 1.4 million or so households in the U.K. that will have to refinance their mortgages over the rest of the year.
It comes on a busy day for central bank action in Europe, including rate decisions from Turkey, Switzerland and Norway.
Central banks around the world, from the U.S. Federal Reserve to European Central Bank, have rapidly raised interest rates to bring down inflation first stoked by supply chain backups tied to the rebound from the pandemic and then Russia’s invasion of Ukraine.
Higher interest rates help lower inflation by making it more expensive for individuals and businesses to borrow, meaning they potentially spend less, reducing demand and pressure on prices.
That clearly comes at a cost, and there are concerns over the outlook for the British economy, which has so far avoided falling into recession even as Europe’s economy has contracted slightly in the six months ending in March.
“Workers are suffering the steepest real-term cuts in living memory, and enormous economic damage is being done because people can’t afford to pay the bills,” said Gary Smith, general secretary of the GMB trade union.
