MercoPress. South Atlantic News Agency

Bank of England raises the base rate to 5% given a stubborn inflation of 8,7%

“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” Bank of England Governor Andrew Bailey said in a statement

The Bank of England, contrary to market expectations of a 25 basis points hike, on Thursday surprised with a 50 basis point hike to interest rates, its 13th consecutive increase as policymakers grapple with persistently high inflation.

The Monetary Policy Committee voted 7-2 in favor of the half percentage point increase, which takes the bank’s base rate to 5%. The pound slipped against the US dollar after the announcement while yields on U.K. government bonds — known as gilts — also retreated slightly. The yield on the 10-year gilt was down by around 4 basis points. Yields move inversely to prices.

Fresh data on Wednesday showed annual UK consumers price inflation was 8,7% in May, unchanged from the previous month, cementing market expectations that the MPC would opt for another hike. Economists also upped their expectations for further monetary tightening in the future.

Most worryingly for the central bank, core inflation — which excludes volatile energy, food, alcohol and tobacco prices — was 7.1% year on year in May, up from 6.8% in April and marking its highest rate since March 1992.

“There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand,” the MPC said in its summary Thursday.

“The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labor market conditions and the behavior of wage growth and services price inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

Policymakers are walking a tightrope as they attempt to tighten monetary policy sufficiently to quell inflationary pressures without triggering a full-scale mortgage crisis and recession.

The MPC said that the high number of fixed-rate mortgages means that the full impact of the increase in the bank rate so far “will not be felt for some time.”

Since the end of 2021, the bank has hiked its main rate from 0.1% to 5%.

“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” Bank of England Governor Andrew Bailey said in a statement Thursday.

“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”

Although all developed economies endured a similar post-Covie pandemic deluge of inflationary pressures, U.K. headline inflation is decelerating at a much slower rate, while the core component is significantly higher than all other G10 nations and still accelerating.

Huw Davies, investment manager at Jupiter Asset Management, said Thursday’s move from the MPC was “a tacit admission that they have been behind the curve in their hiking policy,” and the rate rise represents “an attempt to regain the initiative and their credibility.”

“The key problem is that U.K. real rates have consistently been negative despite the tightening cycle. It feels like the BOE will have to inflict more pain on U.K. households to achieve a return to a controlled level of inflation more in line with their inflation target,” Davies said.