The Bank of England (BoE) hiked its key interest rate to the highest level in 13 years on Thursday, as policymakers around the world combat inflation fueled by high energy prices, Russia’s war in Ukraine and lingering concerns about COVID-19.

The central bank hiked rates for the fourth time since December as U.K. inflation runs at 30-year highs. Its Monetary Policy Committee voted 6-3 to lift the rate that the Bank of England pays other banks by a quarter-percentage point, to 1%.

The three members in the minority wanted to raise it even higher – by half a point to 1.25%, the bank said, in a sign of growing momentum for strong action to counter rising consumer prices.

The BoE’s hike to counter inflation now heading above 10% came even as it sent a warning that Britain risks falling into recession.

"Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and U.K. growth," the bank said.

It said those developments and COVID-19 restrictions in China have worsened the supply chain shocks that the United Kingdom and other countries face.

The decision comes a day after the U.S. Federal Reserve (Fed) stepped up its attack on inflation, approving the biggest rate increase in more than two decades and signaling that more are on the way. The Fed increased its key short-term rate by a half-percentage point, to a range of 0.75% to 1%.

Other central banks around the world, from Sweden to Australia, also have started taking similar action.

The pound fell by around a cent against the U.S. dollar to just under $1.245 following the decision. British government bond yields jumped briefly but soon fell to a day’s low.

Central banks are scrambling to cope with a surge in consumer prices that they described as transitory when it began with the post-COVID-19 reopening of the global economy before Russia’s invasion of Ukraine sent energy prices spiraling.

Soaring consumer prices in the U.K. are fueling a cost-of-living crisis marked by rocketing energy bills and surging food and transport prices.

The BoE is struggling to show it is serious about reining in inflation without moving so aggressively that it undermines consumer confidence.

"The Bank of England has a difficult job ahead of it – inflationary pressures from external factors are getting higher and higher," Dmitri Theodosiu, head of foreign exchange and interest rates trading at Investec, said in a note to investors.

"And with the cries of ‘higher, higher’ ringing in the ears comes the knowledge that too much intervention could see a damaging fall to the economy."

The BoE’s move represented its fourth consecutive rate hike since December – the fastest increase in borrowing costs in 25 years – and it hardened its message about further increases, despite its worries about a sharp economic slowdown.

The BoE said most policymakers believed "some degree of further tightening in monetary policy may still be appropriate in the coming months."

It dropped the word "modest" to describe the scale of rate hikes ahead.

A split emerged in the Monetary Policy Committee with two members saying the guidance was too strong, given the risks to growth.

Business groups expressed concern about Thursday’s move.

"The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures," said Suren Thiru, head of economics at the British Chambers of Commerce.

Inflation to top 10%

British consumer price inflation hit a 30-year high of 7% in March, more than triple the BoE’s 2% target, and the central bank revised up its forecasts for price growth to show it peaking above 10% in the last three months of this year.

It had previously said it expected inflation to peak at about 8% in April.

The BoE said inflation in Britain would peak later than in other big advanced economies due to Britain’s cap on household energy tariffs, which saw bills jump 54% in April and which the BoE thinks will rise a further 40% in October.

Real post-tax household disposable income – a measure of living standards – is forecast to fall 1.75% this year, the biggest calendar-year drop since 2011 and the second-biggest since the BoE’s records began in the 1960s.

Voters in local government elections on Thursday were expected to punish Prime Minister Boris Johnson over the cost-of-living crisis and for breaking his own COVID-19 lockdown rules.

The BoE kept its forecast for economic growth this year at 3.75% but slashed its forecast for 2023 to show a contraction of 0.25% from a previous estimate of 1.25% growth. It cut its growth projection for 2024 to 0.25% from a previous 1%.

While growth in the first quarter of this year has been stronger than the BoE predicted, it expects the economy to stagnate in the second quarter, due to an extra public holiday and reduced COVID testing, and a nearly 1% fall in GDP in the final quarter after the next increase in energy prices kicks in.

Those forecasts were based on bets in financial markets that the BoE would increase interest rates to about 2.5% by the middle of next year and the central bank signaled that was probably too much.

It said it expected inflation would fall to 1.3% in three years’ time, the biggest undershoot relative to its 2% target since the 2008-09 global financial crisis after unemployment rises and the cost-of-living squeeze hits the economy.

The BoE also said it would work on a plan for starting the sale of government bonds that it has bought since the global financial crisis a decade ago, which currently stand at just under 850 billion pounds ($1.05 trillion).

BoE staff will update the MPC on the plan at its August meeting, which would "allow the Committee to make a decision at a subsequent meeting on whether to commence sales."