LONDON: The Bank of England on Thursday unexpectedly lifted interest rates to 0.25 per cent from a record low 0.10 per cent, and flagged more hikes to combat decade-high inflation, despite Omicron fears.
The BoE’s monetary policy committee voted 8-1 in favour of the first interest rate hike in more than three years, but unanimously maintained quantitative easing stimulus, it said in a statement after a regular meeting.
Britain has now become the first central bank of the G7 nations to lift borrowing costs since the coronavirus pandemic first erupted.
In reaction, the pound jumped higher versus the dollar and euro after the modest hike which confounded expectations of no change.
The news comes after the Federal Reserve laid out inflation-fighting plans overnight and paved the way for US rate hikes next year, while the European Central Bank has held record-low eurozone borrowing costs.
‘Finely balanced’ due to Covid
The BoE decision followed official data which showed Wednesday that UK inflation rocketed in November to 5.1 per cent, more than double its 2 per cent target.
The policymakers argued “it would be necessary over coming months to increase Bank Rate in order to return inflation sustainably to the 2 per cent target”, according to minutes from the meeting.
They noted also that consumer price inflation in advanced economies “had risen by more than expected”.
“Most members of the committee judged that an immediate, small increase in Bank Rate was warranted,” read the minutes.
“Although the conditions for tightening set out in November had been met, the decision at this meeting was finely balanced because of the uncertainty around Covid developments.”
They cautioned that the Omicron coronavirus variant, which has spread rapidly over the last month, posed downside risks to activity.
The UK economy also continues to suffer from the ongoing supply crunch.
“Growth in many sectors has continued to be restrained by disruption in supply chains and shortages of labour,” the minutes read.
“The impact of the Omicron variant, associated additional measures introduced by the UK government and devolved administrations, and voluntary social distancing will push down on GDP in December and in” the first quarter of 2022.
Rates had been slashed to a record-low 0.1 per cent at the start of the pandemic in order to boost Britain’s lockdown-hit economy.
However, global inflation has since accelerated sharply after the world emerged from lockdowns earlier this year, with prices soaring as companies struggled to meet demand for goods, energy and services.
The BoE forecast Thursday that inflation would hold around 5.0 per cent “for the majority of the winter period”, and would peak at about 6.0 per cent in April 2022 due to surging domestic energy prices.
Commentators said that rampant inflation had eclipsed potential economic fallout from the latest Covid variant.
“The Bank of England opts for a bold move to fend off inflationary pressures,” KPMG chief economist Yael Selfin said.
“The MPC had to strike a delicate balance between above-target inflation and tight labour market on the one hand, and a weaker short-term outlook and increased Covid uncertainty on the other.”
The UK economy was already struggling prior to Omicron, growing by an anemic 0.1 per cent in October from 0.6 per cent in September.
Omicron, which emerged late last month, forced Britain to re-impose coronavirus restrictions, including guidance to work from home and mandatory Covid passes.
November; however, marked the highest inflation since September 2011, with surging fuel costs pushing the rate further above target.
“The Bank of England has thrown out an anchor to try to stop the fast currents of inflation taking the economy into more dangerous waters,” Hargreaves Lansdown analyst Susannah Streeter said.