The Bank of England raised interest rates by 0.5 percentage points to 2.25 per cent on Thursday, arguing that “further, forceful” monetary tightening was needed to bring inflation under control.
The move takes the BoE’s benchmark rate to its highest level since the start of the global financial crisis in 2008. However, the nine-member Monetary Policy Committee held back from the even more aggressive approach adopted by peers at the European Central Bank and US Federal Reserve. The Fed implemented a third successive 0.75 percentage point increase this week.
Sterling cut its gains on the day against the US dollar after the rate announcement, which was less than markets expected. At around $1.13, sterling is still trading near its weakest level since 1985 against the US currency.
The BoE said its staff now expected UK gross domestic product to fall 0.1 per cent in the third quarter of the year, compared with August’s forecast of 0.4 per cent growth. This would mark a second consecutive quarter of decline, cementing fears that the economy is falling into recession.
The MPC split three ways, with the majority — including BoE governor Andrew Bailey and chief economist Huw Pill — voting for the 50 basis point move. They argued that despite a weakening economic outlook, wage growth and domestic inflation were well above the rates consistent with the BoE’s 2 per cent inflation target while the government’s new energy package would prop up household spending, adding to inflationary pressures in the medium term.
Three members — Jonathan Haskel, Catherine Mann and deputy governor Dave Ramsden — favoured a bigger, 0.75 percentage point increase, arguing that acting faster now could help the BoE avoid “a more extended and costly tightening cycle later”.
Swati Dhingra, a newcomer to the committee, favoured a more modest 0.25 percentage point move on the grounds that economic activity was already weakening.