The Bank of England on Thursday said it would raise borrowing costs by 25 basis points to 1.25% amid fears rising prices are already straining households and weighing on economic growth.
“Bank officials now expect GDP to fall 0.3% for the full second quarter, weaker than expected at the time of the May report,” the Bank of England said in a statement.
“Consumer confidence has continued to fall, but other indicators of household spending appear to have held up. Some business sentiment indicators have weakened, although so far they have remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth,” it added.
The central bank said three members of its monetary policy committee wanted to raise interest rates by 50 basis points to 1.5% – which would have been the biggest hike in 27 years – but were overruled by the other six.
Soaring food and fuel prices have plunged millions of Britons into the worst cost-of-living crisis in decades. Annual CPI inflation rose to 9% in April – the highest level since 1992. The Bank of England now expects inflation to rise slightly above 11% in October. Food research firm IDF said in a report Thursday that food prices Increases could exceed 15% over the summer. Export bans on key commodities, including palm oil from Indonesia, and the war in Ukraine limiting exports from the region are among the factors that have fueled food inflation, the report said.
The British economy is in a grim position. GDP shrank 0.3% in April after falling 0.1% in March, according to data from the Bureau for National Statistics. Output fell in all three main sectors – services, manufacturing and construction – for the first time since January last year.
The Bank of England’s decision comes a day after the US Federal Reserve hiked interest rates by 75 basis points in a bid to bring inflation under control. This is the Fed’s biggest rate hike since 1994.
George Buckley, chief UK and Europe economist at Nomura, told CNN Business it was “understandable” that the Bank of England decided to hike rates more moderately than its US counterpart.
“The Bank of England [thinks] that high current inflation will by itself hamper growth and ultimately lower inflation going forward,” Buckley said.
“The bank is grappling with rising inflation but at the same time the risk of recession – so the disagreements in the committee at this time on the extent of the tightening needed are understandable,” he added.
— Nicole Goodkind contributed to the coverage.