The Bank of England raises interest rates to 4.5%, the highest level in 15 years

The Bank of England raised interest rates on Thursday, its 12th increase in a row, as Britain’s inflation rate remained stubbornly in double digits.

Politicians lifted the central bank’s key interest rate by a quarter of a percentage point to 4.5 percent, the highest since 2008. The long and aggressive policy tightening has continued as the UK experiences inflation that is higher than in the US and Western Europe. Consumer prices rose 10.1 percent in March from a year earlier, the latest data showed, as food prices rose faster than expected, along with prices of other goods such as clothing.

The rate hike addresses “the risk of more sustained strength in domestic price and wage setting,” according to the minutes from the bank’s meeting this week.

Britain’s inflation rate is expected to fall more slowly than the central bank expected three months ago, primarily because food price growth is expected to slow. In March, food prices were almost 20 per cent higher than a year earlier, the fastest rate of inflation in more than 45 years.

At the end of the year, the overall inflation rate, which includes food and energy prices, is estimated to fall to 5.1 per cent, according to the central bank’s forecast. Consumer price data for April, which will be published later this month, is expected to show inflation beginning a more significant decline because a rise in household energy bills will wash out of the annual inflation estimates. A year earlier, household energy bills rose by more than 50 percent after the war in Ukraine pushed up wholesale prices.

As the Bank of England tries to force inflation down to its 2 percent target, good economic news could complicate the task. Three months since the central bank last published its forecasts, it took a particularly pessimistic view of the UK economy, predicting five quarters of economic decline and a mild recession. On Thursday, it unveiled the biggest upgrade to its economic forecasts in the bank’s history, due to lower wholesale energy prices and extra fiscal stimulus from the government. It no longer foresees any quarters of economic decline.

Rather than a recession, this better-than-expected growth, with lower unemployment and rising consumer confidence, could allow some of the inflationary pressures in the economy to persist longer than previously thought.

“Repeated surprises” about the economy’s resilience and the tightness of the labor market have created “circumstances in which domestic price pressures risked becoming more persistent”, said the politicians who voted to raise interest rates, according to the minutes of the meeting.

Still, the upgraded economic outlook is likely to offer only limited comfort to households and businesses. The forecast is weak: the economy will grow by around a quarter of a percent this year, according to the bank’s estimates.

The Bank of England was the first major central bank to start raising interest rates almost a year and a half ago. Now investors and economists are trying to gauge how soon central banks, including the Federal Reserve and the European Central Bank, will pause their hikes. In the United States, inflation fell below 5 percent last month, and Federal Reserve Chairman Jerome H. Powell opened the door to a pause in interest rates amid turmoil in the American banking sector.

In the eurozone, inflation has also peaked, but so-called core inflation, which excludes food and energy prices, is still strong. Last week, Christine Lagarde, the president of the ECB, said the bank was not done raising interest rates yet, as it only started raising rates last summer.

Policymakers at the Bank of England gave few clues about what will come next, but noted that most of the impact of their previous rate hikes has still not been felt. For example, many homeowners with fixed mortgage rates have not yet had to pay higher borrowing costs, the bank said.

Two members of the bank’s nine-person rate-setting committee, Swati Dhingra and Silvana Tenreyro, voted to keep rates steady, as they have done in recent meetings, citing the backlog of previous rate hikes and arguing that the current batch of policy tightening would push inflation “well below” the target of 2 percent.

The minutes of the committee’s meeting said policymakers will continue to watch closely for any indicators of persistent inflation, particularly wage growth and service sector inflation. “If there were evidence of more sustained pressure, further tightening would be necessary,” the minutes said.

Economists at the National Institute of Economic and Social Research said earlier Thursday that they expected interest rates to peak at 4.75 percent, but that they could be held at that level longer than previously thought because of the risk that inflation will not slow as quickly as expected.

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