The Bank of England said on Thursday it would raise the price of loans by 25 basis points to 1.25%, despite fears that rising prices are already putting pressure on households and hampering economic growth.
“Bank employees now expect GDP to fall 0.3% overall in the second quarter, lower than expected in the May report,” the Bank of England said in a statement.
“Consumer confidence has fallen even further, but other indicators of household spending appear to have remained. “Some business sentiment indicators have weakened, although so far they have remained more resilient than consumer confidence indicators and in line with positive GDP growth,” he added.
The central bank said three members of its Monetary Policy Committee wanted to raise interest rates by 50 basis points to 1.5% – the largest increase in 27 years – but were outvoted by the other six.
Rising food and fuel prices have plunged millions of Britons into the worst cost of living crisis in decades. Annual consumer price inflation rose to 9% in April, its highest level since 1992. The Bank of England now expects inflation to rise just over 11% in October. Food research firm IDF said in a report Thursday that food prices could rise by 15% in the summer. Prohibitions on exports of key goods, including Indonesia’s palm oil, and the war in Ukraine, which has limited exports from the region, are among the factors fueling food inflation, the report said.
The UK economy is in a grim position. GDP contracted by 0.3% in April, after falling by 0.1% in March, according to the National Statistics Service. Production fell in all three main sectors – services, manufacturing and construction – for the first time since January last year.
The decision of the Bank of England comes a day after the US Federal Reserve raised interest rates by 75 basis points to bring inflation under control. This is the Fed’s largest increase since 1994.
George Buckley, chief economist for the United Kingdom and Europe at Nomura, told CNN Business that it was “understandable” that the Bank of England had decided to raise interest rates more modestly than its US counterpart.
“The Bank of England [thinks] “This high current inflation will in itself hit growth and ultimately reduce inflation in the future,” Buckley said.
“The bank is struggling with rising inflation, but at the same time the risk of a recession – so the differences in the commission’s views at the moment on the necessary tightening are understandable,” he added.
– Nicole Goodkind contributed to the report.
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