The Bank of England increased its key interest rate by a bigger-than-expected half-point on Thursday. It did not follow the Federal Reserve’s move of standing still for a meeting while it waits for more data.
Most economists expected a quarter-point move. It’s the 13th consecutive increase after starting with rates close to zero in December 2021 and brings the benchmark to 5%, the highest level since 2008.
The...
The BOE has increased rates at 12 consecutive meetings.
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The Bank of England increased its key interest rate by a bigger-than-expected half-point on Thursday. It did not follow the Federal Reserve’s move of standing still for a meeting while it waits for more data.
Most economists expected a quarter-point move. It’s the 13th consecutive increase after starting with rates close to zero in December 2021 and brings the benchmark to 5%, the highest level since 2008.
The central bank warned that borrowing costs may need to rise further. The U.K. is coping with the worst inflation among the Group of Seven countries. The annual rate of price gains held at 8.7% in May, more than four times higher than the BOE’s 2% target. By comparison, the U.S. inflation rate is around 4%.
The gap explains why the U.K. can’t afford to mimic the Fed. Not only has headline inflation come down more slowly than anticipated, but services inflation is still picking up and wage gains are accelerating. That raises worries that inflation is becoming embedded in the economy, adding to the urgency of forceful action from the central bank.
“Inflation is still too high and we’ve got to deal with it,” BOE Governor Andrew Bailey said in a statement. “If we don’t raise rates now, it could be worse later.”
None of the rate-setting Monetary Policy Committee actually voted for the quarter-point hike that had been anticipated. Seven members supported the bigger half-point move, while two were in favor of keeping interest-rates unchanged. The pound was little changed against the dollar after the decision.
“There had been significant upside news in recent data that indicated more persistence in the inflation process,” the BOE said in minutes of the meeting. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
Like the Fed, the BOE has also warned that past interest-rate increases take time to have their full effect. That’s particularly true in the U.K., where a substantial number of homeowners with mortgages will refinance imminently. Many two-to-five-year low-rate deals that were struck before rates started rising are coming up for renewal.
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“Expect more mortgage market mayhem after this big bazooka rate hike,” said Gary Smith, a partner at financial planners Evelyn Partners. “The repricing of home loans looks like it will now be more dramatic and protracted.”
Separately, the central banks in Switzerland and Norway also increased interest rates on Thursday. The Norges Bank delivered a bigger-than-expected half-point move and it said plans to raise rates again in August.
Write to Brian Swint at brian.swint@barrons.com