Bank of England agrees second consecutive rate hike as inflation soars

London

THE Bank of England (BoE) on Thursday (Feb 3) lifted its main interest rate for the second time in a row in a bid to tackle decades-high inflation.

The bank also said Britain's annual inflation rate would peak at 7.25 per cent in April, compared with 5.4 per cent last December which was already near a 30-year high.

The central bank slashed its interest rate dramatically in 2020 to help the economy weather the effects of the Covid-19 pandemic.

With soaring prices now threatening the economic recovery, the BoE decided to raise borrowing costs again by a quarter point to 0.5 per cent.

It had already increased interest rates from a record-low 0.1 per cent to 0.25 per cent in December - the first monetary policy tightening in more than 3 years.

Minutes of the regular meeting said all 9 policymakers judged that a further increase was warranted given a tight labour market and "continuing signs of greater persistence in domestic cost and price pressures".

Policymakers were divided however on the size of the increase.

A majority 5 members, including governor Andrew Bailey, voted for a rise to 0.5 per cent, while the remaining 4 wanted a larger increase to 0.75 per cent.

It is the first time that the BoE has increased its policy rate in 2 successive meetings since June 2004.

Britain's soaring inflation has stoked fears about a cost-of-living squeeze as wages fail to keep pace.

And UK inflation is forecast to move even higher in the coming months with domestic energy prices set to surge.

The BoE's chief task is to keep inflation close to 2 per cent.

At the same time, Britain's economy has surpassed its pre-pandemic level after recording strong growth in November.

Since then, however, retail sales suffered a record drop in December as consumers shunned brick-and-mortar shops owing to concerns over the Omicron variant.

While higher interest rates increase costs for borrowers, including home-owners and businesses, they improve returns on savings.

As the pandemic erupted in early 2020, the BoE slashed its key interest rate from 0.75 per cent and also began pumping massive sums of new cash into the economy.

It has created £450 billion (S$823 billion) under its quantitative easing (QE) programme since March 2020, when Britain imposed its first coronavirus lockdown.

Prior to that, it had pumped hundreds of billions of pounds worth of QE into the UK economy over a decade following the 2008-09 global financial crisis and Brexit.

The central bank's total emergency stimulus package stands at £895 billion, an amount kept on hold on Thursday. AFP