Bank of England Raises Key Rate by 0.25% to 1%

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Bank of England Raises Key Rate by 0.25% to 1%
Credit: © Reuters.

By Geoffrey Smith

Investing.com -- The Bank of England raised its key refinancing rate by a relatively restrained 25 basis points to 1.0% on Thursday, a fourth straight increase that takes U.K. interest rates to their highest in 13 years, just as the U.K. economy shows clear signs of slowing down. 

The Bank warned that the U.K. economy is likely to slip into recession in the autumn, but that it nonetheless needed to tighten monetary policy to bring down inflation , which is running at a 30-year high of 7.0%. The Bank warned that inflation is likely to peak at over 10% in the fourth quarter of this year, due largely to a 40% rise in many households' energy bills. 

"The economy has recently been subject to a succession of very large shocks," the Bank said. "Russia’s invasion of Ukraine is another such shock."

It noted that if current "very elevated" levels for energy and tradable goods prices persist, they will inevitably weigh further on households’ real incomes and companies’ profit margins. 

"This is something monetary policy is unable to prevent," the Bank acknowledged. 

Despite the Bank's own assessment that the economy will weaken sharply as wage increases fail to keep pace with inflation, three of its nine strong Monetary Policy Committee voted to hike by 50 basis points, rather than just 25. Moreover, it signaled further rate rises ahead, saying that "most members of the Committee judge that some degree of further tightening in monetary policy may still be appropriate in the coming months."

The pound weakened on the news, falling to just over $1.2450 in the minutes after the announcement. U.K. bond yields fell, as the market priced in expectations that a long cycle of tightening is unlikely given the sharp slowdown in activity predicted by the Bank. U.K. 2-Year Gilt yields fell 18 basis points to 1.48%, their lowest in three weeks. 10-year Gilt yields fell 10 basis points to 1.87%.

Governor Andrew Bailey told a press conference that the Bank's staff have now begun work on planning a timetable for allowing the bond portfolio amassed during the last two years to run off. He said the Committee will consider staff proposals in August and mostly take a decision in September.

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