Bank of England Hikes Interest Rates to 13-Year High As Inflation Soars

• The Bank of England hiked interest rates by 25 basis points, or 0.25 percentage points, to their highest level in 13 years.
• The BoE’s move Thursday came after the Federal Reserve hiked by 75 basis points in the biggest move since 1994.
• Central banks around the world are grappling with the tricky combination of red-hot inflation but cooling growth.

The Bank of England raised interest rates by 25 basis points or 0.25 percentage points Thursday, the latest step in its ongoing effort to tame UK inflation, which it said would hit 11% later this year.

The move took the BoE’s main interest rate to a 13-year high of 1.25%, from 1% previously. Rates stood at just 0.1% as recently as December.

Like many central banks around the world, the BoE is grappling with a surge in inflation triggered by the stimulus-aided rebound from the coronavirus pandemic, supply-chain disruptions, and soaring energy prices.

On Wednesday, the

Federal Reserve

raised interest rates by 75 basis points for the biggest increase since 1994, less than a week after data showed US inflation surged to a 41-year high in May.

The pound fell against the dollar after the BoE’s decision, and was last down 0.89% to $1.206, from around $1.215 prior to the announcement. London’s FTSE 100 stock index trimmed some losses, and was last down 2.38%.

Inflation in the UK is set to hit 11% later in 2022 as the recent surge in energy prices, driven by Russia’s invasion of Ukraine, triggers a sharp rise in the country’s energy price cap, the BoE said. CPI inflation stood at 9% in April, a 30-year high.

Six out of the nine members of the BoE’s monetary policy committee voted to increase rates by 25 basis points, with the other three voting for a 50 basis point hike.

On top of rampant inflation, the BoE is dealing with an economy that is slowing sharply as rising prices and tax increases drag on growth. Gross domestic product unexpectedly shrank in both April and March, prompting many economists to say the UK is effectively already in a

recession

.

Meanwhile, the pound has fallen sharply against the dollar, causing some analysts to call for bigger rate hikes to attract investors’ money back to the UK.

Karen Ward, JPMorgan Asset Management’s top European strategist, said the bank had erred on the side of caution given the economic slodown.

Yet she said: “It’s possible that by acting cautiously today, it may have to deliver more further down the line.”