Home News The Bank of England raised interest rates by a surprising half point

The Bank of England raised interest rates by a surprising half point

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On Thursday, the Bank of England raised its key interest rate by half a point more than expected. This did not follow the Fed’s decision to stand by for the meeting pending more data.

Most economists expected a quarter-point move. This is the thirteenth consecutive increase after it started with rates close to zero in December 2021 and reached the benchmark at 5%, the highest level since 2008.

The central bank warned that borrowing costs may have to rise further. The UK faces the worst inflation among the G7 countries. The annual rate of price inflation held steady at 8.7% in May, more than four times higher than the 2% target set by the Bank of England. In comparison, the inflation rate in the United States is around 4%.

The gap explains why the UK cannot imitate the Fed. Not only has headline inflation declined more slowly than expected, but service inflation has continued to rise and wage gains have accelerated. This raises concerns that inflation could become part of the economy, adding to the urgency of strong central bank action.

“Inflation remains very high and we need to deal with it,” Bank of England Governor Andrew Bailey said in a statement. If we don’t raise interest rates now, it could be worse later. »

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No member of the Monetary Policy Committee, which sets interest rates, voted to raise the rate by the quarter point that had been planned. Seven members agreed A half-point larger move, while two were in favor of keeping interest rates unchanged. The British pound did not change much against the dollar after the decision.

The BoE said in the minutes of the meeting: “There was a lot of positive news in the recent data indicating the continuation of the inflation process.” If there is evidence of further sustained pressures, further monetary policy tightening will be required. »

Like the Fed, the Bank of England has also warned that it takes time for past interest rate increases to show their full impact. This is particularly true in the UK, where a large number of homeowners who have mortgages will soon be refinancing. Many of the low-cost two- to five-year deals that were made before prices started to rise are about to be renewed.

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“We expect more chaos in the mortgage market after the bazooka rate hike,” said Gary Smith, partner at financial planners Evelyn Partners. “It appears that the re-pricing of mortgages will now be more dramatic and prolonged.”

Separately, the central banks of Switzerland and Norway raised interest rates on Thursday. The Bank of Norway made a half-point larger-than-expected move and said it plans to raise interest rates again in August.

Write to Brian Swint at brian.swint@barrons.com

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