Bank of England raises interest rates by 50 bps to 5% after inflation shock

Bank of England interest rate: In line with expectations, the Bank of England (BoE) raised interest rates on Thursday (June 22, 2023). The central bank hiked rates by 50 basis points (bps) to 5 per cent from 4.5 per cent earlier. With today’s hike, the Bank of England has raised interest rates for the 13th time in a row. A day earlier, inflation data came in higher than expected.

In a statement on Thursday, the bank said its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a fresh 15-year high of 5 per cent.
The decision was somewhat of a surprise, with most economists predicting a smaller quarter-point hike. But figures on Wednesday showed UK inflation unexpectedly holding steady at 8.7 per cent, fuelling concerns over the outlook for prices. There had been predictions for a modest decline to 8.4 per cent.

The rate hike will pile further pressure on borrowers, particularly the 1.4 million or so households in the UK that will have to refinance their mortgages over the rest of the year.
It comes on a busy day for central bank action in Europe, including rate decisions from Turkey, Switzerland and Norway.

Central banks around the world, from the US Federal Reserve to European Central Bank, have rapidly raised interest rates to bring down inflation first stoked by supply chain backups tied to the rebound from the pandemic and then Russia’s invasion of Ukraine.

Economists polled by Reuters last week were unanimous that the BoE would raise rates to 4.75 per cent, their highest since 2008, from 4.5 per cent. But after inflation held at 8.7 per cent in May, investors were pricing a 45 per cent chance that the BoE would opt for a bigger move and raise rates by half a percentage point, even as fears mount about the hit to mortgage holders and the risk of a recession, Reuters said in a report.

Britain’s economy, which has been hit by the shock of Brexit as well as the COVID-19 pandemic and the surge in gas prices caused by Russia’s invasion of Ukraine, has dodged a widely expected recession so far in 2023, though growth looks set to be a minimal 0.25 per cent this year, according to the BoE’s forecasts. Unlike most other big, rich economies, output has barely recovered to pre-pandemic levels. However, two inflation readings since the BoE’s last rate hike in May have both been higher than expected, the Reuters report added.

With inputs from Reuters

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