By Roland Jackson
The Bank of England on Thursday hiked its main interest rate to its pre-pandemic level to combat runaway inflation that risks soaring far higher as the Ukraine conflict fuels energy costs.
The BoE hiked borrowing costs by a quarter-point to 0.75%, its third increase in a row.
The decision came one day after the US Federal Reserve carried out the first of what is expected to be a number of rate hikes this year to tackle decades-high inflation.
The UK central bank said the country’s annual inflation rate could top 8.0% this year, as the Ukraine war fuels already sky-high prices for oil, gas and other commodities.
It had previously forecast inflation to peak at 7.25% in April.
The BoE even warned that, should wholesale energy prices continue to soar, inflation could potentially be “several percentage points higher” than the prior estimate.
Eight members of the bank’s nine-strong Monetary Policy Committee, including governor Andrew Bailey, voted to lift its key rate by a quarter point, while Jon Cunliffe wanted it kept at 0.5% due to worries over the soaring cost of living.
“Regarding inflation, the invasion of Ukraine by Russia has led to further large increases in energy and other commodity prices including food prices,” the BoE said in a statement.
“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly.”
The bank said global inflationary pressures would “strengthen considerably further” over the coming months, meaning that net energy importers including Britain would likely experience slowing growth.
The latest official data showed that UK annual inflation hit 5.5% in January, the highest level since 1992.
Inflation is rocketing around the world also as economies reopen from the pandemic.
The Fed on Wednesday announced a quarter-point rate hike, the first since it slashed its rate to zero at the start of the Covid-19 crisis.
“Like the US Federal Reserve, the bank is signalling an unyielding approach in the face of surging inflation,” said Deloitte chief economist Ian Stewart.
“That points to further increases in interest rates on both sides of the Atlantic in the next 12 months, and to weaker growth.”
The European Central Bank last week “significantly” lifted its inflation forecasts for the eurozone on sky-high energy prices and uncertainty over the war in Ukraine, but it gave itself time before raising interest rates.
The UK’s February inflation data is due Wednesday.
This coincides with a budget update from the government, which is facing higher repayment costs on its vast pandemic bill following rate hikes.
Finance minister Rishi Sunak has already announced a major tax hike starting in April on UK workers and businesses.
That same month, a cap on domestic gas and electricity bills is set to significantly increase.
While Britain’s unemployment rate has fallen to its pre-pandemic level, wages are eroding at the fastest pace in eight years as prices soar.
“UK consumers now face an annus horribilis, as rising borrowing costs will be compounded by higher food and energy bills, and tax rises to boot,” said AJ Bell analyst Laith Khalaf.
He noted that while rate hikes “will mean savers getting a bit more return on cash held in the bank, elevated inflation means they will actually be worse off”.
The bank also confirmed Thursday it would stop the reinvestment of government bonds under its massive quantitative easing stimulus, which now stands at £867 bln ($1.1 trln).
© Agence France-Presse