You are here

Bank of England lifts interest rate to 15-year high

By AFP - May 11,2023 - Last updated at May 11,2023

The Bank of England's Deputy Governor Monetary Policy, Ben Broadbent, Governor of the Bank of England Andrew Bailey, Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor Markets and Banking, Dave Ramsden address the media during the Monetary Policy Report press conference at the Bank of England, in London, on Thursday (AFP photo)

LONDON — The Bank of England (BoE) on Thursday lifted its key interest rate to the highest level since the 2008 financial crisis, noting inflation remained stubbornly high but that the economy would now avoid recession this year.

The BoE hiked the rate by a quarter-point to 4.5 per cent — its 12th increase in a row with UK annual inflation stuck above 10 per cent, fuelling a cost-of-living crisis across Britain.

Global policymakers are battling elevated inflation caused largely by runaway energy bills following last year's invasion of Ukraine by major oil and gas producer Russia.

Following a regular policy meeting, the BoE warned of "considerable uncertainties" on when UK inflation would return to its two-per cent target, as soaring food prices offset sharp drops to energy costs.

At the same time, the central bank made a record upgrade to its British GDP forecast, adding there would be only a small impact from recent turmoil in the commercial banking sector.

"Six months ago, we were expecting a shallow but long recession," BoE governor Andrew Bailey told a press conference.

"Since then, energy prices have fallen substantially and economic activity is holding up much better than expected."

Bailey said the UK would this year experience "modest but positive economic growth and a much smaller increase in unemployment.

"We think inflation will fall quite sharply over the coming months," he added.

Official data Friday is expected to show the UK economy grew during the first quarter of this year after narrowly avoiding recession in the last three months of 2022.

The rate decision comes one week after UK Prime Minister Rishi Sunak's Conservative government suffered a drubbing in local elections, as voters gave their verdict over rampant living costs despite government efforts to partly subsidise energy bills.

The nation has been plagued by strikes as high inflation erodes the value of wages. Train staff will walk out again on Friday following months of industrial action across the private and public sectors.

The latest BoE hike is set to deepen the crunch in living standards as retail banks pass on the increase, resulting in higher repayments on loans, including mortgages.

At the same time, those who can afford to save will benefit for increased fixed returns on investments.

"Although it is good news that the Bank of England is no longer forecasting recession, today's interest rate rise will obviously be very disappointing for families with mortgages," said British Finance Minister Jeremy Hunt. 


Highest inflation in G-7 


Thursday's news took British borrowing costs to a level last seen in October 2008, before rates were slashed during the global financial crisis.

The BoE has ramped up borrowing costs from a record-low of 0.1 per cent in December 2021.

Its latest hike came one week after the European Central Bank and the Federal Reserve implemented quarter-point rate increases as inflationary pressures ease only slightly in the eurozone and the United States.

UK annual inflation stood at 10.1 per cent in March, the highest level in the Group of Seven richest nations.

Sunak and the BoE blame the high level in part on rises to pay and have urged employers to show restraint.

BoE Chief Economist Huw Pill recently stated that Britons need "to accept that they're worse off and stop trying to maintain their real spending power by bidding up prices via higher wages".


38 users have voted.


Get top stories and blog posts emailed to you each day.