The Bank of England raised interest rates by half a percentage point on Thursday, moderating the pace of increases while Britain braces for a prolonged recession with inflation eating away at household budgets.
The central bank expects that the British economy is already in a recession and that inflation has peaked. Consumer prices rose 10.7 percent in November from a year earlier, data published on Wednesday showed. That was down slightly from 11.1 percent in October, the highest annual rate since 1981.
Even as Britain faces a challenging economic outlook, most of the bank’s nine-person rate-setting committee said that they expected more increases in interest rates will be needed to bring inflation back to the bank’s 2 percent target.
The Bank of England started raising rates a year ago and over the course of nine policy meetings the bank has lifted rates from 0.1 percent to 3.5 percent, the highest since 2008. In November, it increased rates by three-quarters of a point.
“There were considerable uncertainties” around the economic outlook, according to the minutes of the bank’s meeting. “If the outlook suggested more persistent inflationary pressures” the committee that sets interest rates would “respond forcefully.”
Higher energy prices, especially since Russia’s war in Ukraine began earlier this year, have been heavily responsibly for the sharp increase in inflation in Britain. But the central bank has grown more concerned at the extent to which high prices have seeped into the British economy, with service businesses setting higher prices and wages rising quickly.
The bank said that the labor market remained tight and inflationary pressures in the British economy could make large price increases more persistent, as it continued to raise interest rates despite the grim economic outlook. In particular, service price inflation and wage growth in the private sector have been rising faster than the central bank expected. Before adjusting for inflation, private-sector pay rose at an annual rate of 6.9 percent in the three months to October, data published on Tuesday showed.
The bank’s decision came a day after the Federal Reserve raised interest rates by half a percentage point. Later on Thursday, the European Central Bank is expected to follow both the Fed and Bank of England in moderating its pace of interest rates increase to half a point, from three-quarters of a point.
