The Bank of England decided to lift interest rates by a half point to the highest level since 2008 in a contested decision, as the U.K. central bank joins peers across the globe in trying to bring inflation down by quelling demand.
The vote was 5-to-4 to bring rates to 2.25%, with three members calling for a 75 basis point hike while one voted for a quarter-point increase.
The U.S. Federal Reserve on Wednesday opted for a 75 basis point hike, as did the Swiss National Bank earlier on Thursday. The Norges Bank increased rates by a half point, while the Bank of Japan kept rates unchanged.
The Bank of England unanimously agreed to begin reducing the size of its balance sheet, with a plan to reduce it by £80 billion over the next 12 months.
According to the minutes, the majority viewed that “a tight labor market with wage growth and domestic inflation well above target-consistent rates justified a further, forceful response from monetary policy.”
The pound
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wavered in the aftermath of the decision, but was higher on the day, at $1.1312 vs. $1.1271.
The yield on the 2-year gilt
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rose 14 basis points to 3.50%.
The central bank noted the uncertainty around the outlook for U.K. energy prices has fallen after the new Liz Truss-led government opted to guarantee household energy prices. The central bank said it will make a full assessment in November, as the government is set to deliver its mini budget on Friday.
The three who wanted a 75 basis point hike — Jonathan Haskel, Catherine Mann and Dave Ramsden — pointed out the energy guarantee would also add to demand pressure. Swati Dhingra, who wanted a 25 basis point hike, said activity already appears to be weakening, and the risks of second-round effects from inflation were falling.
The Bank of England said it expects inflation to peak in October, at under 11%, compared to the 9.9% rate in August.
