The Bank of England raised interest rates on Thursday by half a percentage point to 3.5 per cent, the highest level in 14 years, and warned that further rate rises were likely.
In a vote showing a majority on the central bank’s Monetary Policy Committee for “forceful” action against inflation, six of the nine members backed the increase and one favoured a larger 0.75 percentage point rise.
The bank has now increased interest rates at each of the past nine meetings, the most aggressive set of hikes since 1989.
Sterling fell and yields on UK government debt rallied after the announcement.
The US Federal Reserve also raised its benchmark rate by 0.5 percentage points on Wednesday and a similar increase is expected by the European Central Bank on Thursday.
Andrew Bailey, BoE governor, expressed concern that UK companies would keep raising prices too fast for too long — even though he declared that inflation, which edged down to 10.7 per cent in November, “has reached its peak”.
“The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence,” he wrote in a letter to chancellor Jeremy Hunt on the MPC decision. Bailey added that such factors justified “a further forceful monetary policy response”.
The majority of MPC members said further rate rises were likely “for a sustainable return of inflation to target”. But they did not say whether rates would have to rise as high as financial market expectations, which currently forecast a peak of just above 4.5 per cent by the middle of 2023.
Two MPC members voted to keep interest rates on hold at 3 per cent, saying the level of borrowing costs was already high enough to curb spending and bring inflation down to the BoE’s 2 per cent target.
By contrast, the seven hawkish voices on the MPC were concerned that private sector wage growth, at around 7 per cent, had risen faster than they expected, which could force companies to keep raising prices at rates well above the BoE’s 2 per cent target.
Catherine Mann, the external MPC member who voted for an even larger rate rise, said the bank needed to combat “an inflation psychology that was embedding in wage settlements and inflation expectations, and was pushing up core services and other underlying inflation measures”.
The two members who voted to keep interest rates on hold — Silvana Tenreyro and Swati Dhingra — warned that the effects of the interest rate rises to date had not been fully felt by households and companies. As a result, they said, a 3 per cent interest rate was “more than sufficient to bring inflation back to target, before falling below target in the medium term”.
After the announcement, the yield on the UK’s two-year bond fell 0.07 percentage points to 3.36 per cent as the price of the debt instrument rose. The yield on the 10-year bond also fell 0.07 percentage points to 3.23 per cent. Sterling sank against the dollar, sliding 0.8 per cent to $1.232, having hit its highest point in six months earlier in the week.
