LONDON—Fears that the British economy is heading for recession mounted sharply Thursday after the Bank of England raised borrowing costs by more than anticipated, seeking to combat stubbornly high inflation with a hike that will hit borrowers hard, particularly homeowners who have to refinance in the coming months.
Financial markets are pricing in a potential rate peak of 6%, a level not hit since early 2000, after Bank Gov. Andrew Bailey warned of further increases if inflation fails to show clear signs of slowing. Inflation has proven stickier in the U.K. than in other major economies, with many blaming the bank for being too slow to start raising borrowing rates and Britain’s departure from the European Union, which has added to import costs.
Across Europe, central banks also decided to push up borrowing costs Thursday, including the Swiss National Bank with a quarter-point hike and Norway with a half-point increase. Turkey hiked sharply in a signal of a shift from unusual economic policies. “The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency,” warned Max Mosley, an economist at the National Institute for Economic and Social Research.
In a recession, unemployment would inevitably increase and home repossessions would become more prevalent — hardly the backdrop the Conservative government wants ahead of a likely general election next year. It is trailing the main opposition Labour party in the polls.
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