British Central Bank Hikes Rates In Bid to Tame Runaway Inflation

The Bank of England announced its interest rate decision on Thursday. (Yui Mok/PA)

Britain’s central bank has raised its benchmark interest rate for the fifth time in a row in an effort to quell the country’s cost-of-living crisis, becoming the latest monetary authority to tighten in response to runaway inflation.

Policymakers at the Bank of England (BOE) decided on June 16 to raise the so-called Bank Rate by 0.25 percentage points to 1.25 percent, with three of the nine-member Monetary Policy Committee (MPC) voting for an even bigger 50 basis point hike.

Like the Federal Reserve in the United States, Britain’s central bank has an inflation target of 2 percent, which has been eclipsed by a soaring 9 percent pace of price growth in April and MPC expectations for that to climb to over 11 percent later this year.

The policymaking body remains ready to keep tightening monetary settings further if inflation stays high, with the MPC saying in a statement that it “will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

Minutes from the MPC policy meeting show members expect Britain’s economy will shrink by 0.3 percent in the second quarter, raising the risk of a recession, which is typically defined as two successive quarters of economic contraction.

While the MPC did not update its third-quarter GDP outlook, it previously said it expects the economy to grow in the July-September period, a prediction that would allow the UK to dodge a recession if the forecast holds.

Despite a hawkish tilt in the MPC statement, Britain’s decision to hike rates by 25 basis points rather than by a greater amount suggests policymakers are concerned about the prospect of weaker growth and are reluctant to overtighten.

“Today’s decision should, we think, be read as another sign that the Bank isn’t going to tighten nearly as much as markets expect,” analysts at ING said in a note.

“Even if the latest government support package helps insure against a technical recession, the outlook remains fragile and vulnerable to another leg higher in energy prices later this year,” they continued.

“And while the jobs market continues to suffer from a lack of workers, the latest data hinted that shortages are no longer getting worse.”

Britain’s 25 basis point rate hike comes on the same day that Switzerland raised its benchmark interest rate by 50 basis points and Taiwan by 12.5 basis points.

The Federal Reserve on Wednesday matched market expectations and hiked rates by 75 basis points, the sharpest increase since 1994.