The Bank of England increased the key interest rate by 0.25 percent to 0.5 percent on Thursday, the first time since 2004 that it has implemented consecutive rate hikes.
Of the nine members of the rate-setting monetary policy committee, five voted for an increase of 0.25 percent while the other four wanted a steeper hike of 0.5 percent, reflecting growing concerns about rising prices.
The committee also warned that inflation will peak in April at around 7.25 percent, roughly two percent higher than previously envisioned, due to consistent energy price growth worldwide.
“In the recent unprecedented circumstances, the economy has been subject to very large and repeated shocks,” the panel said. “Should recent movements prove persistent, the sharp rises in price of global energy and tradable goods of which the United Kingdom is a net importer will necessarily weigh on U.K. real aggregate income and spending.”
The long-term hit from inflation to the U.K. economy would drive down GDP growth to around 1.25 percent in the first quarter of 2023 and one percent in the first quarter of 2024, the BoE projected. Unemployment is also likely to rise to five percent in 2024 from four percent currently.
Household income adjusted for inflation is likely to fall by 2 percent by the end of this year, the worst decrease since at least 1990.
However, the projections don’t take account of relief measures the government announced on Thursday to take the bite out of energy costs.
The BoE also said it’ll be gradually reducing its stocks of government bonds by stopping reinvestments of maturing debt with immediate effect. And it’ll sell corporate bonds until none remain on its balance sheet “no earlier than towards the end of 2023.”
Interest rates are likely to continue increasing in the U.K. in response to price inflation, said the BoE, marking growing policy divergence from peers such as the European Central Bank. Shortly after the BoE’s announcement, the ECB said that, as expected, it was holding policy steady for now.
A U.K. rate hike had been widely expected, but some analysts viewed the announcement as signaling an even harder turn to contain inflation.
“The announcement was more hawkish than anticipated,” wrote the Centre for Economics and Business Research in a report. “Given that a high proportion of the [policy committee] would have preferred a sharper rate rise, this suggests that there will be more rate rises to come over the course of the year.”
The Bank, meanwhile, acknowledged the impact of costlier credit, high prices and declining living standards would be difficult for the country to overcome.