Bank Of England Lifts Interest Rate To 4%, First Hike In Over 3 Years

(RTTNews) - The U.K. central bank raised its key interest rate on Thursday, as expected, for the first time since 2023 in an attempt to cushion the future impact of the second-round effects of high energy prices and warned that more hikes would be necessary if the Middle East conflict does not resolve fast.

The Monetary Policy Committee of the Bank of England, led by Governor Andrew Bailey, raised the bank rate by 25 basis points to 4.00 percent. The decision was taken by a split-vote of 8-1 as policymaker Catherine Mann was in favor of a bigger 50 basis points hike to 4.25 percent.

The previous hike in the bank rate was a 25 basis points hike to 5.25 percent in August 2023.

"There is now enough inflationary pressure in the pipeline caused by the rise in energy prices that an increase in Bank Rate is warranted," BoE Governor Bailey said. "Today's increase shouldn't be seen as the first in an inevitable long sequence of hikes," Bailey said. "But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase."

Policymakers will assess the outlook at each meeting and respond as necessary to bring inflation sustainably back to the 2 percent target, the BoE chief added.

The central bank expects U.K. inflation, which has now risen to 3.5 percent, to rise even further to about 5 percent by mid-2027 driven by the knock-on effects of higher energy prices.

While BoE policymakers agreed that there is little evidence of significant second-round effects of high energy prices on other prices and wages, so far, they assessed that energy prices have been elevated for long enough to expect those effects to eventually materialize.

They also judged that the resilience of the U.K. economy adds to the risk that higher energy prices affect other prices. This prompted them to act now to reduce the adverse impact, the bank said.

"The degree of inflationary pressure in the pipeline is now sufficient to warrant an increase in Bank Rate," the bank said. "Activity data in recent months have generally been stronger than expected, adding to the case for modestly tighter monetary policy."

Policymakers assessed that firms' have been absorbing the impact of high energy prices through low profit margins and they will be forced to eventually pass through the same to the consumer if the energy shock continues.

The MPC assessed that the new policy measures unveiled in the budget is likely to have only a small impact on activity and have a downward impact of 0.25 percentage points on CPI inflation by the second quarter of next year. In absolute terms, the stance of fiscal policy remained likely to detract from growth over the medium term, the bank said.