BUSINESS BoE hikes interest rate to 13-year peak as inflation soars


BoE hikes interest rate to 13-year peak as inflation soars


21:03, May 05, 2022

Governor of the Bank of England Andrew Bailey reacts as he addresses the media on the Monetary Policy Report at the Bank of England, in London, on May 5, 2022. (Photo: AFP)

The Bank of England on Thursday raised its main interest rate by a quarter point to one percent to tackle runaway UK inflation that is causing a cost-of-living crisis.

It was the fourth straight rate rise by the BoE, which added that British annual inflation would top 10 percent this year, fuelled by energy prices.

BoE policymakers voted 6-3 at a regular meeting for a hike to one percent -- the highest level since the global financial crisis in 2009.

A minority called for a bigger increase to 1.25 percent, while the BoE said in a statement that it "may need to increase interest rates further in the coming months".

BoE governor Andrew Bailey voted for a rise of 0.25 percent.

The pound tumbled against the dollar as the BoE highlighted recession risks to the UK economy.

The latest rate tightening came as Britons on Thursday headed to the polls in local elections, seen as a mid-term test for embattled Prime Minister Boris Johnson.

It also follows the Federal Reserve's decision Wednesday to raise US interest rates by half a percentage point as inflation soars also in the world's biggest economy.

Central banks worldwide are raising interest rates with inflation sitting at the highest levels in decades.

Speaking at a press conference, Bailey highlighted the impact of the inflationary shock.

"I recognise the hardship this will cause for many people in the UK, particularly for those on the lowest incomes, often with little or no savings, who are hit hardest by the increases in basic necessities like food and energy," he said.

Pound slumps

The British pound plunged more than two percent to $1.2362 after the BoE decision.

"The pound is under pressure as a result of the vote split... suggesting that there is increasing nervousness about the UK economic outlook and the risk of recession," Interactive Investor analyst Victoria Scholar told AFP.

The BoE said UK output was expected to contract in the final quarter of the year when inflation is set to top double figures as household energy prices rise sharply.

Consumer prices are surging as economies reopen from pandemic lockdowns, and in the wake of the Ukraine war that is aggravating already high energy costs.

"The Bank of England condemns Russia's actions and the suffering inflicted on Ukraine," Bailey told journalists.

He added that global inflationary pressures sharply intensifying after Russia's invasion of neighbour Ukraine had caused a "material deterioration in the outlook for world growth".

Britain's annual inflation stands at 7 percent -- the highest level in three decades, while a rate of 10 percent would be a four-decade peak.

Bailey insists that the central bank is seeking to tackle high inflation while avoiding Britain falling into recession.

Britons' cost-of-living has soared further in recent weeks following a tax hike on UK workers and businesses in addition to a fresh surge in domestic energy bills.

An erosion to workers' salaries owing to high inflation is seen weighing on British economic output.

The UK economy is set to grow by 3.7 percent this year, the International Monetary Fund recently forecast.

That was sharply down on an IMF estimate of 4.7 percent given in January, one month before Russia's invasion of Ukraine.

As the Covid-19 pandemic began in early 2020, the BoE slashed its key interest rate to a record-low 0.1 percent and also pumped massive sums of new cash into the economy.

The Bank of England started raising rates last December.

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