The Bank of England decided to raise interest rates for the ninth time in a row by 0.5% to a 14-year high of 3.5%, continuing efforts to tame high inflation.
The nine-member Monetary Policy Committee is split on the decision as policymakers try to balance the risks of entrenched inflation against too much pressure on growth as the economy enters recession.
Six members including Gov. Andrew Bailey voted for a half-point increase. Catherine Mann favors three-quarters of a point, while Silvana Tenreyro and Swati Dhingra support keeping rates unchanged.
"The majority of the committee assesses that, should the economy expand broadly in line with the November Monetary Policy Report Projections, a further increase in bank rates may be necessary," Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt.
Hunt appeared to take pressure from the BOE to raise rates in his first exchange of letters with the governor since he became chancellor. His predecessor had urged the bank to act "forcefully" against rising inflation.
Market players are reducing rate hike bets, pricing interest rates will rise to 4.52% by August compared to 4.61% before Thursday's half-point hike.
In a statement from the Treasury after the decision, Hunt admitted higher rates would make it difficult for many households.
“I know it's hard for people right now, but it's important that we stick to our plans. "The sooner we get a grip on inflation the better. Any action that risks injecting high prices permanently into our economy will only prolong the risk for everyone”.
The meeting minutes also said that the labor market remained tight, and there was evidence that inflationary pressures in domestic prices and wages could have an extended effect. Officials at the BOE estimate the UK is now in recession, arguing the economy was slightly stronger than expected in November. Gross domestic product in the fourth quarter will likely fall 0.1% following a 0.5% decline in the third quarter, the BOE said.
On the other hand, consumer prices fell from 11.1% in October to 10.7% in November and labor market participation improved, with 76,000 inactive people rejoining the workforce and job vacancies falling. However, wages rose at the fastest rate in two decades.
