The Bank of England Thursday announced an increase in its base interest rates by 0.25 percentage points to 1 percent after the U.K.’s annual inflation hit a 30-year high of seven percent in March. Inflation is expected to peak at around 10 percent in the fourth quarter.
The rate hike is the fourth since the Old Lady of Threadneedle Street began tightening policy in a bid to slow the rate of rising prices without inflicting too much pain on the British economy. But that might be a task too great as the Bank expects growth to slow sharply over the first half of the forecast period on the back of higher prices, especially for energy.
“GDP is projected to fall in [the fourth quarter], driven largely by the decline in households’ real incomes, including that stemming from the projected rise of around 40 [percent] in retail gas and electricity prices when … price caps are next reset in October,” it noted in its report. “Calendar year GDP growth is broadly flat in 2023.”
In its press statement, the Monetary Policy Committee noted that a majority of 6-3 voted to increase the benchmark rate by 0.25 percentage points, to 1 percent, while the remaining three sought a more hawkish adjustment of 0.5 percentage points.
Fears over inflation have gripped central bankers across the Western Hemisphere. The U.S. Federal Reserve on Wednesday took a more aggressive strategy than the BoE, announcing the biggest interest rate increase in over two decades.
Market watchers will now turn their attention to the European Central Bank, which has yet to raise rates. Its Governing Council will next meet on June 9.
This alert has been updated.