Bank of England raises interest rates to highest level in 15 years

The Bank of England raised interest rates on Thursday, its 12th consecutive increase, as UK inflation remained stubbornly in the double digits.

The central bank also improved its economic forecasts for the UK economy, dispelling any predictions of recession, aided in part by falling energy prices.

The improved outlook is good news amid a stronger labor market, but food prices remain elevated and policymakers said the slowdown in food inflation would be more gradual than they expected.

Policymakers raised the central bank’s key interest rate by a quarter of a percentage point to 4.5%, the highest since 2008. Protracted and aggressive policy tightening continues as Britain faces inflation higher than in the United States And Western Europe. Consumer prices rose by 10.1 percent in March from a year earlier, the latest data showed.

“Inflation remains too high,” central bank governor Andrew Bailey told reporters on Thursday. “Our job is to bring it all the way back to the 2 percent target and keep it there.”

Policymakers raised rates again on Thursday to meet their target, he said, adding, “We need to stay on track to make sure inflation falls all the way back” to the target.

UK inflation is expected to fall more slowly than the central bank expected three months ago, mainly because food price inflation is expected to decline slowly. In March, food prices were almost 20 percent higher than a year earlier, the highest rate of inflation in more than 45 years.

By the end of the year, headline inflation, including food and energy prices, is expected to fall to 5.1 percent, the central bank predicted. Consumer price data for April, due to be released later this month, is expected to show inflation starting a more substantial slowdown as an increase in household utility bills washes out of annual inflation calculations. A year earlier, household energy bills rose more than 50 percent after the war in Ukraine drove up wholesale prices.

As the Bank of England tries to curb inflation, good economic news could complicate its mission. Three months ago, when the central bank last issued its forecasts, it took a particularly pessimistic view of the UK economy, predicting five quarters of economic contraction and a mild recession. On Thursday, it unveiled what it described as the biggest improvement in its economic forecasts in the bank’s history, due to lower wholesale energy prices and government stimulus: It does not foresee any more quarters of economic contraction.

But this better-than-expected growth, with lower unemployment and rising consumer confidence, could allow some of the inflationary pressures to last longer than previously thought.

“Repeated surprises” about the economy’s resilience and labor market tightness have created “conditions where domestic price pressures threatened to become more intractable,” said the policymakers who voted for rate hikes, according to the minutes of the meeting.

Still, the improved outlook is likely to provide limited comfort to households and businesses. The forecast is weak: the economy will grow by about a quarter of a percent this year, according to the bank’s forecasts.

The Bank of England was the first major central bank to begin raising interest rates nearly a year and a half ago. Now investors and economists are trying to gauge how quickly 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 Fed Chairman Jerome H. Powell opened the door to an interest rate pause amid the turmoil in the US banking sector.

Inflation has also peaked in the eurozone, but so-called core inflation, excluding food and energy prices, is still strong. So said Christine Lagarde, the president of the ECB, last week the bank had not yet finished raising interest ratesas it only started lifting rates last summer.

Policymakers at the Bank of England gave little indication of what might come next, but noted that most of the impact of their previous rate hikes had still not been felt. For example, many homeowners with fixed-rate mortgages have not yet had to pay higher borrowing costs, according to the bank. At the end of this year, approximately 1.3 million households are expected to reach the end of the fixed-interest period.

Two members of the bank’s nine-member interest rate committee, Swati Dhingra and Silvana Tenreyro, voted to keep rates stable, as they have done in recent meetings. would push inflation “well below” the 2 percent target.

According to the minutes of the committee meeting, policymakers would continue to closely monitor all indicators of continued inflation, especially wage growth and inflation in the services sector. “If there were indications of continued pressure, further tightening would be necessary,” the minutes said.

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