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The Bank of England on Thursday hiked interest rates by 50 basis points, its largest single increase since 1995, and projected the U.K.’s longest recession since the global financial crisis.
The sixth consecutive increase takes borrowing costs to 1.75% and marks the first half-point hike since the bank was made independent from the British government in 1997.
“That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs,” the MPC said in its accompanying statement.
“As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.”
Britain’s energy regulator, Ofgem, increased the energy price cap by 54% from April to accommodate soaring global costs, but is expected to rise by a greater degree in October, with annual household energy bills predicted to surpass £3,600 ($4,396).
The bank now expects headline inflation to peak at 13.3% in October and to remain at elevated levels throughout much of 2023, before falling to its 2% target in 2025.
The MPC noted that the labor market remains tight, with domestic cost and price pressures elevated, adding that there is a risk that a “longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.”
“The labour market has remained tight, with the unemployment rate at 3.8% in the three months to May and vacancies at historically high levels,” the MPC said. “As a result, and consistent with the latest Agents’ survey, underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.”
Sterling was down over 0.5% against the dollar following the bank’s announcement, trading at around $1.209, while the FTSE 100 index climbed 0.5%.
Cost-of-living crisis
In a news conference following the announcement, Bank of England Governor Andrew Bailey said the shock of Russia’s war in Ukraine is now the largest contributor to U.K. inflation “by some way.”
“There is an economic cost to the war, but I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target,” he added.