Bank of England Raises Rates for Fifth Time to Tame Inflation

Bank-of-England-Raises-Rates-for-Fifth-Time-to-Tame-Inflation

U.K. central bank sticks to its cautious pace with a quarter-point rise in its key rate, but signals it might act more forcefully

LONDON—The Bank of England on Thursday raised its key interest rate by a quarter percentage point for the fifth consecutive time, but said larger moves might be needed to tame inflation.

The bank’s latitude to raise rates is limited by mounting impediments to growth. These include soaring energy costs caused by the Ukraine war and a possible trade dispute with the European Union after the U.K. government presented legislation that would allow it to tear up parts of its Brexit agreement with the bloc.

As in the U.S., the U.K. has seen a surge in consumer prices since early 2021, driven by higher energy costs and supply-chain bottlenecks. In response, the U.K.’s central bank first raised its key interest rate in December while the Federal Reserve announced its first move in March.

While it started later, the Fed has moved faster, raising its key interest rate by a half percentage point in May and three-quarters of a point Wednesday. The Fed signaled it would continue tightening policy this year at the most rapid pace in decades as it races to combat inflation.

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The BOE stuck to its more cautious pace Thursday, raising its key rate to 1.25% from 1%. That means the central bank has increased borrowing costs at five straight meetings of its Monetary Policy Committee, a sequence unmatched since the group of nine officials were given control over interest rates in 1997.

But the central bank said it may set caution aside and raise its key interest rate by a half percentage point at a coming meeting if it appears that high inflation is becoming more deeply embedded in the domestic U.K. economy, rather than being imported from outside in the form of higher energy and food prices.

“The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully,” the central bank said in a statement.

At the conclusion of their meeting Tuesday and Wednesday, three of nine MPC members voted for an increase in the key rate to 1.5%.

The BOE’s expected move followed a surprise rate rise by the Swiss National Bank earlier Thursday. The increase from minus 0.75% to minus 0.25% was the first move higher since 2007. The SNB said further rate rises “cannot be ruled out.”

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The U.K.’s rate of inflation hit a 40-year high of 9% in April, the fastest rise in prices recorded by one of the Group of Seven rich economies since the current surge began at the start of last year. The BOE expects the inflation rate to peak at more than 11% after a further jump in home energy prices that is likely to be announced in October.

The U.K. also faces the weakest outlook for growth among the Group of 20 large economies, with the exception of Russia. In a report released last week, the Organization for Economic Cooperation and Development said it expected the U.K.’s economy to stagnate in 2023, with the U.S. forecast to grow 1.2% and the eurozone by 1.6%.

The U.K. economy contracted in March and April, data released Monday showed, and the BOE on Thursday said it expects the economy to shrink 0.3% over the second quarter as a whole.

This weakness limits the BOE’s ability to raise rates, which typically has a negative impact on growth as it damps demand.

“The current situation is a timely reminder of the precarious situation faced by policy makers, who must try and bring inflation under control without plunging the economy into a recession,” said Kemar Whyte, an economist at the National Institute for Economic and Social Research.

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Like the U.S., the U.K. has a tight jobs market that partly reflects the decision of many older workers to leave the labor force during the Covid-19 pandemic, as well as the departure of EU workers in the wake of Brexit. According to a study released by the Institute for Fiscal Studies on Thursday, the number of people in their 50s and 60s not in work or looking for work is up a quarter of a million from the prepandemic level.

“This rise in inactivity is driven by a lifestyle choice to retire in light of changed preferences or priorities during the pandemic,” said Bee Boileau, an economist at the IFS.

The BOE worries that the shortage of workers will lead to a sharp rise in wages, increasing the risk that businesses will further raise prices to maintain their profit margins, leading to a prolonged period of high inflation.

While figures released Tuesday showed that wages rose 4.2% in the three months through April from the same period a year earlier, that left real pay down around 3.5%.

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