Fears of persistent high inflation, slow wage growth and high mortgage rate have forced the Bank of England to raise the interest rate by 0.5 percent to a 5 percent. This is its 13th consecutive hike, taking the interest rate in the United Kingdom to its highest since 2008.
The latest rate hike has surprised analysts who had expected a 0.25 percent rise. In fact, the UK’s central bank had given little indication of such a steep rate hike this time.
The Bank of England’s rate increase comes a week after the European Central Bank decided to raise the lending rate to 3.5 percent.
The Bank of England Governor Andrew Bailey has defended the move, which was approved 7-2 by the UK central bank, saying that the central bank will do “whatever necessary to return to inflation under 2 percent in the medium run.”
Inflation, slowing growth a worry
The UK central bank said that there is “significant” news that inflation in the UK will take much longer to decline.
The UK faces a tricky inflation challenge as inflation has been slow to fall from the 41-year high of 11.1 percent seen last year.
According to Reuters, consumer price inflation remained unchanged at 8.7 percent in May and underlying inflation rose to its highest since 1992.
Meanwhile, the Britain’s economy continues to face shocks from Brexit, Covid-19 pandemic and surging energy prices amid the Ukraine war. But it has miraculously dodged a widely expected recession so far.
However, unlike most other advanced economies, output has barely recovered to pre-pandemic levels, while growth this year is pegged at 0.25 percent.
(With inputs from Reuters)
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