Bank of England makes biggest interest rate hike in 30 years
LONDON — The Bank of England rolled out its biggest interest rate increase in three decades Thursday, saying the move was needed to beat back stubbornly high inflation that is eroding living standards and is likely to trigger a “prolonged” recession.
The central bank boosted its key rate by three-quarters of a percentage point, to 3%, as Russia’s invasion of Ukraine has driven up food and energy costs, pushing consumer price inflation to 40-year highs. The aggressive step was expected after a more cautious half-point increase six weeks ago and matches the recent moves by the U.S. Federal Reserve and the European Central Bank.
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While higher interest rates will boost the cost of mortgages and credit card debt for already-stretched consumers, the move was necessary to control inflation that has left people with less money to spend and is slowing economic activity, Bank of England Gov. Andrew Bailey said.
“If we do not act forcefully now, it will be worse later on,” Bailey told reporters, hinting he’d be prepared for more increases ahead.
The bank, whose task got tougher after former Prime Minister Liz Truss’ economic plans roiled financial markets, forecast that the British economy is likely to contract for two years through June 2024. That would be the longest recession since at least 1955, according to the Office for National Statistics.
The rate increase is the Bank of England’s eighth in a row and the biggest since a short-lived 1992 hike. It comes a day after the U.S. Federal Reserve announced a fourth consecutive three-quarter point jump.
Central banks worldwide have struggled to contain inflation after initially believing price increases were fueled by international factors beyond their control. Their response has intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.
Thursday’s rate decision was the first since Truss’ government announced 45 billion pounds ($52 billion) of unfunded tax cuts, which sent the pound plunging to record lows against the U.S. dollar, pushed up mortgage costs and forced Truss from office after just six weeks.
