Bank of England raises interest rates to 5% in surprise move to tackle stubborn inflation

The Bank of England raised interest rates by a bigger-than-expected half a percentage point on Thursday after it said there had been “significant” news suggesting British inflation would take longer to fall.

“Second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge,” it added. MPC members Silvana Tenreyro and Swati Dhingra opposed the rate rise – as they have all others this year – saying that much of the impact of past tightening had yet to be felt, and forward-looking indicators pointed to steep falls in inflation and wage growth ahead.

Expectations for BoE rate tightening have surged in recent days – sharply raising the cost of new mortgages – and before Thursday’s decision financial markets expected the BoE’s Bank Rate to peak at 6 per cent by the end of the year. By contrast, economists polled by Reuters last week saw a 5 per cent peak.

The BoE’s rate increase follows the European Central Bank’s decision last week to raise rates by a quarter-point to 3.5 per cent, and rate rises by the Swedish and Norwegian central banks earlier on Thursday. The BoE retained its previous guidance on future policy, which stated that if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.

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