The Bank of England raised interest rates on Thursday, its 12th consecutive rise, as Britain’s inflation rate remained stubbornly in the double digits.
Policymakers raised the central bank’s key interest rate by 25 percentage points to 4.5 percent, the highest since 2008. The long and aggressive policy tightening has continued as Britain experiences inflation higher than in the United States and Western Europe. Consumer prices rose 10.1 percent in March from a year earlier, the latest data showed, as food prices rose faster than expected along with prices of other goods.
The rate hike addresses “the risk of more persistent force in domestic price and wage-setting,” according to minutes of the bank’s meeting this week.
Britain’s inflation rate is expected to fall more slowly than the central bank expected three months ago, mainly because food price inflation is expected to fall slowly. In March, food prices were nearly 20% higher than a year earlier, the fastest rate of inflation in more than 45 years.
By the end of the year, the global inflation rate, which includes food and energy prices, is expected to drop to 5.1%, the central bank predicted. Data published later this month for April are expected to show inflation starting to decelerate more substantially as a rise in household energy bills will wipe out annual inflation calculations. A year earlier, household energy bills soared by more than 50% after the war in Ukraine drove up wholesale prices.
As the Bank of England tries to force inflation down to its 2% target, good economic news could complicate its mission. Three months ago, when the central bank last published its forecasts, it took a particularly pessimistic view of the British economy, predicting five quarters of economic contraction and a mild recession. On Thursday, it released the biggest update to its economic forecasts in the bank’s history, on the back of lower wholesale energy prices and the government’s extra fiscal stimulus. It no longer foresees any quarters of economic contraction.
Rather than a recession, this higher-than-expected growth, with lower unemployment and rising consumer confidence, may allow some of the inflationary pressures in the economy to persist longer than previously thought.
Still, the updated economic outlook is likely to offer only limited comfort to families and businesses. The forecast is weak: the economy would grow around 25% this year, according to the bank’s projections.