Bank of England raises rates to 1pc despite recession risk

The Bank of England raised interest rates to their highest since 2009 on Thursday, hiking by a quarter-point to 1 percent to counter inflation now heading above 10 percent, even as it sent a warning that Britain risks falling into recession.

The BoE’s nine rate-setters voted 6-3 for the rise from 0,75 percent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase, to 1,25 percent, to stamp out the risk of the inflation surge getting embedded in the economy.

Economists polled by Reuters had forecast a more dovish 8-1 vote to raise rates to 1 percent, with one policymaker opposing a hike. The pound fell by around a cent against the dollar to just under $1.245.

US British government bond yields jumped briefly but soon fell to a day’s low as investors digested the BoE’s policy statement.

Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post- reopening of the global econ

COVID omy, before Russia’s invasion of Ukraine sent energy prices spiralling.

The BoE said it was also worried about the impact of China’s pandemic lockdown policies, which threaten to hit supply chains again and add to inflation pressures.

On Wednesday, the U.S. Federal Reserve raised rates by half a percentage point to a range of 0,75-1 percent, its biggest increase since 2000, and Fed chair Jay Powell said further 50 basis-point hikes were on the table for the next two meetings.

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The BoE’s move represented its fourth consecutive rate hike since December – the fastest increase in borrowing costs in 25 years – and it hardened its message about further increases, despite its worries about a sharp economic slowdown.

The BoE said most policymakers believed “some degree of further tightening in monetary policy may still be appropriate in the coming months”.

It dropped the word “modest” to describe the scale of rate hikes ahead.

A split emerged in the Monetary Policy Committee with two members saying the guidance was too strong, given the risks to growth. Business groups expressed concern about Thursday’s move.

“The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures,”said Suren Thiru, head of economics at the British Chambers of Commerce.

Inflation to top 10 percent

British consumer price inflation hit a 30-year high of 7 percent in March, more than triple the BoE’s 2 percent target, and the central bank revised up its forecasts for price growth to show it peaking above 10 percent in the last three months of this year.

It had previously said it expected inflation to peak at about 8 percent in April. − Reuters.