Thursday, the Bank of England raised its base rate from 1.75 percent to 2.25 percent. This was less than the 0.75 percentage point that many traders had expected.
In August, inflation in the U.K. went down a little, but at 9.9% year-on-year, it was still well above the bank’s goal of 2%. Energy and food prices have gone up the most, but if you take those out, the annual rate of core inflation is still 6.3%.
The bank now thinks that inflation will peak at just under 11% in October, instead of 13% as it did before.
Even though the bank had said that it thought the U.K. economy was already in a recession and had predicted that GDP would grow by 0.4% in the third quarter, it decided to raise rates instead. After a 0.1% drop in the second quarter, this would be the next drop.
The so called Bank Rate, which is the BOE’s key rate, will drop to 0.1% in March 2020. This was done to boost growth and spending as the coronavirus pandemic began. But when inflation started going up quickly at the end of last year, it was one of the first major central banks to start raising rates at its December meeting.
Seventh rate hike in a row
This is the seventh time in a row that interest rates have gone up. They are now at a level not seen since 2008.
In a statement explaining its decision, the bank said that wholesale gas prices can change a lot, but that announcements of government caps on energy bills would keep the consumer price index inflation from going up even more. But it said that since August, there had been more signs of “continuing strength in inflation caused by domestic factors.”
Many analysts and the British Chambers of Commerce have said before that they think the U.K. will go into a recession before the end of the year. It is also facing trade bottlenecks because of Covid-19 and Brexit, a drop in consumer confidence, and a drop in retail sales.
Five members of the Monetary Policy Committee voted for the 0.5 percentage point increase, while three voted for the higher 0.75 percentage point increase that many people had expected. One person voted for an increase of 0.25 percentage points.
