The Bank of England in London in this picture taken on August 4, 2022.
London – As expected, the Bank of England raised the key interest rate by a quarter of a percentage point to 5.25 percent today. The bank has been raising interest rates to combat high inflation and also warned in a statement that borrowing costs are likely to remain high for some time. The Bank of England's (BoE) monetary policy committee has raised key interest rates for the 14th time in a row and Britain's key rate is at its highest since the height of the global financial crisis in 2008.
Analysts polled by Reuters had expected an increase of a quarter of a percentage point. But some have speculated that the BoE could repeat June's surprise move to raise interest rates by as much as half a percentage point as inflation remains high.
Unlike the US central bank (Fed) or the European Central Bank (ECB), which also raised rates by a quarter of a percentage point last week, the BoE did not give much indication that rate hikes should end. Britain is still struggling with high inflation, which, although it decreased to 7.9 percent in June, is still the highest compared to other leading world economies and far from the BoE's two percent target.
The bank now expects inflation to slow to 4.9 percent by the end of this year. That's a sharper reduction than she estimated in May. However, inflation is expected to return to the two percent target only in the second quarter of 2025, i.e. three months later than it predicted in May.
According to the bank, the country's economy is surprisingly resilient. According to the new forecast, the gross domestic product (GDP) will increase by 0.5 percent this year and next, and by 0.25 percent in 2025. In May, it predicted that GDP would rise by 0.25 percent this year. The International Monetary Fund recently said it forecast Britain's economy to grow by 0.4 percent this year, the second-slowest growth of the G7 after Germany.
The British economy, hit by Brexit shock, but also the covid-19 pandemic and the rise in gas prices in response to the Russian invasion of Ukraine has so far avoided the widely expected recession this year. But unlike most other big rich economies, it has barely recovered to pre-pandemic levels yet.
The Bank of England will become the first major central bank to raise borrowing costs in December 2021. But critics blame it from an insufficiently vigorous procedure.