The Bank of England raised interest rates for the first time in three years, setting aside concerns over a surge in COVID-19 infections to combat the highest inflation rate in a decade.
The first major central bank to hike its benchmark interest rate since the pandemic began opted to lift borrowing costs by 15 basis points to 0.25%, delivering an increase that no other Group of Seven (G7) central bank has made since the start of the global pandemic.
The British pound rallied as much as 0.8% while U.K. 10-year yields jumped 5 basis points after the rate decision. Economists now forecast the Bank of England’s key rate will rise as high as 1% by September 2022.
Markets are pricing in another 20-basis points interest rate increase in February, implying an 80% chance of a move to 0.5% at that next meeting.
Officials led by Bank of England Governor Andrew Bailey voted 8-1 for the interest rate increase. Policy makers said more “modest” tightening is likely to be needed as inflation heads toward a peak of about 6% in April 2022.
The decision to raise rates in the context of surging inflation and flagging growth is a clear statement of the Bank of England’s priorities. The U.S. Federal Reserve set a hawkish tone on the eve of the British central bank’s announcement by signaling three interest rate increases next year and accelerating the wind down of its stimulus program.
