Bank of England hikes interest rate to 0.25% to combat inflation

London

THE Bank of England on Thursday (Dec 16) hiked its key interest rate from a record-low 0.10 per cent to 0.25 per cent, as it seeks to combat decade-high inflation despite Omicron fears.

The decision confounded market expectations for no change and came one day after news that UK inflation rocketed in November to 5.1 per cent, more than double the BoE's 2.0-per cent target.

The BoE's monetary policy committee voted 8-1 in favour of the first interest rate hike in more than 3 years, but unanimously decided to maintain quantitative easing stimulus, it said in a statement.

Policymakers deemed the hike "necessary" in order to return UK inflation towards its official target level, adding 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 minutes from the gathering. "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 also noted however 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, it cautioned.

"Growth in many sectors has continued to be restrained by disruption in supply chains and shortages of labour," it added.

"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 (gross domestic product) 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 forecasted on Thursday that inflation would hold around 5 per cent "for the majority of the winter period" - and would peak at about 6 per cent in April 2022 due to surging wholesale gas prices.

The UK economy was already struggling prior to Omicron, growing by an anaemic 0.1 per cent in October, from 0.6 per cent in September.

Prime Minister Boris Johnson has warned of a looming "tidal wave" of Omicron that could overwhelm hospitals. AFP