Today the Bank of England raised its key interest rate to 2.25% from 1.75% – the highest level since November 2008.
The bank also said it would continue to “respond aggressively, as necessary” to inflation, despite the economy entering a recession.
The Bank of England estimates that the British economy will contract by 0.1% in the third quarter – due in part to the additional public holiday for Queen Elizabeth’s funeral.
That, combined with lower production in the second quarter, fits the definition of a technical recession.
Economists polled by Reuters last week had expected a repeat of the August price increase by half a point.
But financial markets bet on a three-quarter point increase, the largest since 1989, barring a brief failed attempt in 1992 to prop up sterling.
The Bank of England’s move follows the US Federal Reserve’s decision last night to raise its key interest rate by three-quarters of a percentage point, as central banks around the world grapple with post-COVID labor shortages and the impact of the Russian invasion of Ukraine on energy prices.
“If expectations point to further persistent inflationary pressures, including from strong demand, the Committee will respond aggressively, as necessary,” the BoE said.
She used a similar form of words for the months prior to her political intentions.
The Bank’s Monetary Policy Committee voted 5-4 to raise rates to 2.25%, with Deputy Governor Dave Ramsden and Foreign Monetary Policy Committee members Jonathan Haskell and Catherine Mann voting for a 2.5% increase.
New MPC member Swati Dhingra wanted a smaller increase to 2%.
The Monetary Policy Committee also voted unanimously to reduce the Bank of England’s 838 billion pounds of government bond holdings by 100 billion pounds over the next year, by allowing bonds to mature and through active sales, which will begin next month.
This is in line with the goal I announced in August.
The Bank of England said it now expects inflation to peak at just under 11% in October, down from the peak of 13.3% it forecast last month, before Liz Truss won the leadership of the Conservative Party and became Britain’s prime minister with her promise of a cap on energy tariffs and cuts. taxes.
The Bank of England said today that inflation will remain above 10% for a few months after October, before declining.
UK consumer price inflation fell to 9.9% in July from a 40-year high of 10.1% in August, its first decline in nearly a year.
Tomorrow the new Finance Minister Kwasi Quarting will give more details of the government’s financial plans, which could amount to more than 150 billion pounds of stimulus.
The Bank of England said it will assess the implications for monetary policy at its November meeting.
However, he noted that capping energy prices, while reducing inflation in the short term, would boost pressures further.
Prior to the rate decision, financial markets had expected the bank to raise interest rates to 3.75% by the end of the year, with a peak of 5% in mid-2023.
Less than a year ago, the Bank of England’s interest rates at 0.1% were a record low.
The pound fell to its lowest level since 1985 against the US dollar after the Fed’s decision, although it held up better against the euro.