The Bank of England raised its benchmark interest rate for the third time in as many months, lifting borrowing costs to pre-pandemic levels as the central bank warned that the war in Ukraine could push inflation above 8% this year.
The increase in the benchmark interest rate to 0.75% is the latest sign that the U.K. is leading the way in a global tightening of monetary policy and makes it the first major central bank to bring rates back to the levels they were at before the pandemic.
But officials led by Governor Andrew Bailey tempered their economic outlook by saying that a further tightening of policy “might be” appropriate in the coming months, a softening from the wording in February, when they said such a move was “likely.”
The Bank of England also warned that the squeeze on household incomes in the U.K. will be “materially larger” than forecast at its last policy meeting six weeks ago.
That suggests that the committee expects an increasingly delicate balancing act in the coming months as it weighs both how to combat inflation and the growing threats to the economy from the impact of the war in Ukraine. Debate about a half-point rate rise that dominated the February meeting gave way to discussion about whether to hold off on further action.
Traders removed bets on a single 50 basis-point interest rate increase by June after the announcement. The pound sterling reversed gains and yields on government bonds also dropped following the latest interest rate increase.
The central bank said inflation now looked set to climb to around 8% in the second quarter, up from 7.25% previously. It warned the peak rate later this year could be “several percentage points higher” than estimated in February.
The Bank of England targets inflation at 2%, similar to the Bank of Canada’s inflation target.
The action in the past three meeting marks the quickest pace of tightening at the Bank of England since 1997, just after the British central bank won the authority to set policy independently
