The Bank of England on Thursday raised interest rates by another half percentage to hit 4 per cent, the tenth consecutive rate hike in the central bank's battle to curb soaring inflation even as it forecast a shallower recession this year than previously feared.
In an accompanying monetary report, the Bank hinted that there is a chance this week's might be the last interest rate hike for some time, saying that it would only raise rates further "if there were to be evidence of more persistent (inflationary) pressures" than in it expects.
The Bank has alongside upgraded its forecast for the British economy, with inflation having "peaked" and expected to come down gradually this year.
"The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2 per cent inflation target, and in a way that helps to sustain growth and employment," the Bank said in a statement.
"At its meeting ending on 1 February 2023, the MPC voted by a majority of 7-2 to increase Bank Rate by 0.5 percentage points, to 4 per cent. Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom," it said.
While it notes that inflation has begun to fall, in December 2022 prices were still 10.5 per cent higher than a year ago – the highest inflation figure in decades.
"Higher energy prices are one of the main reasons for this. Russia's invasion of Ukraine led to large increases in the price of gas. Higher prices for the goods we buy from abroad have also played a big role,” the bank notes.
While it still projects a technical recession, the contraction of the economy would be a "much shallower projected decline in output" with overall growth falling by 0.5 per cent in 2023, compared with its November forecast of a 1.5 per cent fall.
A recession is defined as when the economy shrinks for two consecutive three-month periods, or quarters.
"Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank's action today so we succeed in halving inflation this year," said UK Chancellor Jeremy Hunt, in response to the Bank of England’s announcement.
"We will play our part by making sure government decisions are in lockstep with the Bank's approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone," he said.
Higher interest rates can encourage people to save more and spend less, which is expected to help stop prices rising as quickly and curb inflation.
"Inflation is biggest threat to living standards in a generation, we support the Bank's action today. We will continue to take the decisions needed to reduce inflation," British Prime Minister Rishi Sunak’s spokesperson told reporters.
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