The Bank of England on Thursday (11) lifted its key interest rate to the highest level since the 2008 financial crisis, noting inflation remained stubbornly high but that the economy would now avoid recession this year.
The BoE hiked the rate by a quarter-point to 4.5 per cent, its 12th increase in a row with UK annual inflation stuck above 10 per cent, fuelling a cost-of-living crisis across Britain.
Following a regular policy meeting, the BoE warned of “considerable uncertainties” on when UK inflation would return to its two-per cent target, as soaring food prices offset sharp drops to energy costs.
At the same time, the central bank made a record upgrade to its British GDP forecast, adding there would be only a small impact from recent turmoil in the commercial banking sector.
“Six months ago, we were expecting a shallow but long recession,” BoE governor Andrew Bailey told a press conference.
“Since then, energy prices have fallen substantially and economic activity is holding up much better than expected.”
Bailey said the UK would this year experience “modest but positive economic growth and a much smaller increase in unemployment.
“We think inflation will fall quite sharply over the coming months,” he added.
Official data Friday (12) is expected to show the UK economy grew during the first quarter of this year after narrowly avoiding recession in the last three months of 2022.
The rate decision comes one week after prime minister Rishi Sunak’s Tory government suffered a drubbing in local elections, as voters gave their verdict over rampant living costs despite government efforts to partly subsidise energy bills.
The nation has been plagued by strikes as high inflation erodes the value of wages. Train staff will walk out again on Friday following months of industrial action across the private and public sectors.
The latest BoE hike is set to deepen the crunch in living standards as retail banks pass on the increase, resulting in higher repayments on loans, including mortgages.
At the same time, those who can afford to save will benefit for increased fixed returns on investments.
“Although it is good news that the Bank of England is no longer forecasting recession, today’s interest rate rise will obviously be very disappointing for families with mortgages,” said British finance minister Jeremy Hunt.
(AFP)
