Bank of England raises interest rates again as inflation moves towards 11%

The Bank of England said Thursday it would raise the cost of borrowing by 25 basis points to 1.25%, despite fears that rising prices are already putting pressure on households and weighing on economic growth.

“Bank staff now expect GDP to fall 0.3% in the second quarter as a whole, weaker than expected at the time of the May report,” the Bank of England said in a statement.

“Consumer confidence has continued to decline, but other household spending indicators appear to be holding up. Some business confidence indicators have weakened, although so far they have remained more resilient than consumer confidence indicators and consistent with positive underlying GDP growth,” is in the report. added.

The central bank said three members of its Monetary Policy Committee wanted to raise interest rates by 50 basis points to 1.5% – which would have been the largest rise in 27 years – but were outnumbered by the other six.

Rising food and fuel prices have plunged millions of Britons into the worst cost of living crisis in decades. Annual consumer price inflation rose to 9% in April, the highest since 1992. The Bank of England now expects inflation to rise slightly above 11% in October.
Food research firm IDF said in a report on Thursday that supermarket price increases can be 15% in summer. Export bans on key commodities, including palm oil from Indonesia, and the war in Ukraine, which has curbed exports from the region, are among the factors fueling food inflation, the report said.

The UK economy is in a grim position. GDP shrank 0.3% in April, after falling 0.1% in March, according to data from the Office for National Statistics. Production fell in all three major sectors – services, manufacturing and construction – for the first time since January last year.

The Bank of England’s decision comes a day after the US Federal Reserve raised interest rates by 75 basis points to bring inflation under control. That is the Fed’s largest increase since 1994.

George Buckley, chief economist for the UK and Europe at Nomura, told CNN Business it was “understandable” that the Bank of England had decided on a more modest rate hike than its US counterpart.

“The Bank of England” [thinks] that high current inflation in itself will hit growth and ultimately lower inflation going forward,” Buckley said.

“The bank is grappling with rising inflation, but at the same time with the risk of a recession – so it is understandable that the committee is currently divided on the extent of the tightening required,” he added.

Nicole Goodkind contributed to the reporting.

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