The Bank of England raised its key interest rate by another 50 basis points on Thursday, warning that its fight against inflation is far from over. At the same time it indicated that the BoE is likely to stop its policy tightening in the middle of the year.
The move, as expected by financial markets, took the Bank rate to 4%, the highest since the 2008 financial crash.
By raising the cost of mortgages and consumer credit, it threatens to precipitate an already obvious recession. The International Monetary Fund expects the U.K. will be the only G7 economy to shrink this year, and household spending was already showing signs of slowing at the end of last year.
However, the Bank had to keep raising interest rates because inflation was also running higher than in the US. or the rest of Europe and, at 10.5% in December, did not fall as quickly elsewhere.
"Headline CPI inflation has begun to moderate and is likely to fall sharply throughout the year due to recent movements in energy and other commodity prices," the Bank said in a statement accompanying the decision. "However, the labor market remains strong and domestic price and wage pressures are stronger than expected, indicating a risk of greater persistence in core inflation."
Even so, his calculations still show that the current market expectation of a peak of around 4.5% in mid-2023 is consistent with inflation falling to the 2% target in the medium term. This suggests that the BoE does not see the need to raise the Bank rate by more than 50 basis points again.
As in December, the Monetary Policy Committee was not unanimous in its decision, with two members voting for no change in the Bank rate.
U.K. market reacted quickly to the Bank's guidance, which is the clearest signal yet that it is nearing the end of its tightening cycle. The GBP currency is down 0.7% against the US dollar at the time of writing.
