The Bank of England (BoE) Thursday lifted its key interest rate by a half-point to 5% to tackle stubbornly high British inflation despite such a move possibly worsening a cost-of-living crisis.
The BoE's Monetary Policy Committee (MPC) voted 7-2 to raise its main interest rate to 5% from 4.5%, the highest since 2008 and its largest rate increase since February, following stickier inflation and wage growth since policymakers last met in May.
"The economy is doing better than expected, but inflation is still too high and we've got to deal with it," BoE Governor Andrew Bailey said after the decision. "If we don't raise rates now, it could be worse later," he added.
Economists polled by Reuters had expected a move to 4.75%, although financial markets earlier on Thursday had seen a nearly 50% chance of a rise to 5%, following higher-than-expected inflation data released on Wednesday.
The sterling briefly spiked higher against the U.S. dollar while two-year bond yields briefly dipped below 5% after the BoE decision.
"Yesterday's shock inflation reading ... has clearly spooked the Bank of England into taking more drastic action than predicted," Richard Carter, head of fixed income research at Quilter Cheviot.
"Until inflation begins coming down to more palatable levels the Bank of England will continue to put the brakes on the economy."
BoE policymakers had given little indication that a half-point rate increase was under consideration in the run-up to Thursday's announcement.
"There has been significant upside news in recent data that indicates more persistence in the inflation process," the MPC said. "Second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge."
MPC members Silvana Tenreyro and Swati Dhingra opposed the rate rise – as they have all others this year – saying that much of the impact of past tightening had yet to be felt, and forward-looking indicators pointed to steep falls in inflation and wage growth ahead.
Britain's high inflation rate is also a problem for Prime Minister Rishi Sunak who has pledged to halve the pace of price growth this year in an attempt to win back voter support ahead of a national election expected in 2024.
A spokesperson for Sunak said shortly before Thursday's rates announcement that Sunak supported Bailey. Finance Minister Jeremy Hunt said the BoE had his full support and "tackling inflation relentlessly must be the immediate priority."
Bailey has been criticized by some lawmakers from Sunak's Conservative Party for not acting sooner and more aggressively on inflation.
A half-point hike was in stark contrast to the U.S. Federal Reserve (Fed), which last week pressed pause on U.S. rate hikes after a sharp easing in the country's inflation.
The European Central Bank last week raised its borrowing costs by a quarter point.
The Swiss and Norwegian central banks hiked their rates on Thursday.
Traders anticipate U.K. interest rates will hit 6% by the end of the year, likely pushing Britain into recession.
The BoE began lifting its key interest rate from a record low of 0.1% at the end of 2021, with inflation starting to creep up as economies slowly emerged from lockdowns.
U.K. inflation went on to strike a 41-year peak at 11.1% in October on rampant energy bills after major oil and gas producer Russia invaded Ukraine in early 2022.
The BoE is tasked by the government to keep U.K. annual inflation close to a target of 2%.
