The Bank of England hiked interest rates by half a percentage point on Thursday, more than expected. It did not follow the Federal Reserve’s move to hold a meeting while awaiting more data.
Most economists were expecting a quarter-point move. This is the 13th consecutive hike after rates started near zero in December 2021, and brings the benchmark to 5%, its highest level since 2008.
The central bank warned that borrowing costs may need to rise further. The UK has the highest inflation among the Group of Seven countries. The annual rate of inflation was 8.7% in May, more than four times the BOE’s 2% target. In comparison, the inflation rate in the US is around 4%.
The gap explains why the UK cannot afford to emulate the Fed. Not only has headline inflation fallen more slowly than expected, service sector inflation is still rising and wage growth is accelerating. This raises concerns that inflation is taking hold in the economy, increasing the urgency of taking strong action by the central bank.
“Inflation is still too high and we have to deal with it,” BOE Gov. Andrew Bailey said in a statement. “If we don’t raise rates now, it could get worse later.”
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None of the rate-setting monetary policy committees actually voted in favor of the expected quarter-point hike. Seven members supported the a larger half-point change, while two were in favor of leaving interest rates unchanged. The pound was little changed against the dollar after the decision.
“There has been clearly positive news in the latest data, suggesting that the inflationary process remains ongoing,” the BOE said in the minutes of the meeting. “Should there be evidence of prolonged pressures, further tightening of monetary policy would be required.”
Like the Fed, the BOE has warned that past rate hikes will take time to unfold. This is particularly true in the UK, where a significant number of homeowners with mortgages will be rescheduling shortly. Many low-interest contracts with a term of two to five years, which were concluded before the start of the interest rate hike, are due for renewal.
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“Expect more chaos in the mortgage market after this big Bazooka rate hike,” said Gary Smith, partner at financial planner Evelyn Partners. “The revaluation of home loans is now likely to be more dramatic and lengthy.”
Irrespective of this, the central banks in Switzerland and Norway also increased interest rates on Thursday. Norges Bank achieved a larger-than-expected rate hike of half a percentage point and announced plans to raise rates again in August.
Write to Brian Swint at [email protected]