The Bank of England raised interest rates by a quarter point on Thursday, as inflation remained stubbornly high, aided in part by strong wage growth.
Bank of England raised interest rates
The move raises the main cost of borrowing for commercial banks in the United Kingdom to 5.25%, the highest level since February 2008, and marks the central bank’s 14th consecutive hike since it began raising rates in December 2021.
The bank made a split decision. Six members of the monetary policy committee voted in favor of a quarter-point increase, two in favor of a half-point increase, and one in favor of a pause.
“Recent data outturns have been mixed,” the Bank of England said in a statement. “However, some key indicators, notably wage growth, suggest that some of the risks from more persistent inflationary pressures may have begun to crystallize.”
It’s bad news for more than 2 million UK mortgage holders, who are already facing significant increases in their monthly mortgage payments if they are forced to refinance this year or next.
According to the financial product comparison website Moneyfacts, the average two-year fixed-rate mortgage cost 6.85% on Thursday, up from 3.95% in August.
Borrowers may face additional hardship in the future
The Bank of England, like the US Federal Reserve and the European Central Bank, has hinted that it may be about to pause its rate hikes.
However, “depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain,” central bank governor Andrew Bailey said in a video posted to Twitter on Thursday.
Prior to Thursday’s increase, financial markets expected the Bank of England’s benchmark interest rate to reach 5.75% by the end of the year as the central bank attempted to contain rising prices.
Kallum Pickering, senior economist at Berenberg, wrote in a note Tuesday that “probably less than half” of previous rate hikes “has passed through into the real economy so far.
“The UK thus faces many more months of de facto policy tightening to come even after policymakers stop raising the bank rate,” he added.
Despite recent relief, inflation in the United Kingdom remains stubbornly high. Consumer price inflation was 7.9% in June, down from 11% in October 2022, but still the highest among the Group of Seven rich countries and well above the Bank of England’s target rate of 2%.
Core inflation, which excludes volatile food and energy costs, fell to 6.9% last month from 7.1% in May, the highest rate in 31 years.
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