Bank of England raises interest rates to highest level in nearly 15 years

This is the 12th consecutive rate hike at the BoE Monetary Policy Committee (MPC) meeting since December 2021 in an effort to stem inflation, which is currently at 10.1%. At the previous meeting, the MPC also raised the base rate by 0.25%, to 4.25%.

The MPC said the decision to raise interest rates was necessary to control inflation, warning that if there was evidence of persistent inflation, further tightening of monetary policy would be necessary.

Speaking to reporters after the BoE announced the interest rate hike, BoE Governor Andrew Bailey said: "We are forced to continue to maintain the interest rate hike roadmap to ensure inflation returns to the target level of 2%."

However, the BoE said the rate hike from 0.1% in December 2021 to 4.5% has not had a major impact on households, with only 30% of households being fully affected by the move. Meanwhile, financial markets are forecasting that borrowing costs will continue to rise, possibly reaching close to 5%.

The BoE also raised its short-term inflation forecast much higher than previously forecast, expecting inflation to fall from the current 10.1% to 5.1% in the fourth quarter of 2023, instead of the previously forecast 3.9%.

The UK's inflation rate was the highest in the Group of Seven (G7) major industrialised nations in March, with consumer prices rising 10.1% year-on-year, more than double that in the US.

The BoE believes that the target of reducing inflation to below 2% within a year can only be achieved in early 2025 after the general election.

Raising interest rates is a solution that many central banks have implemented to curb the rate of inflation that has reached record levels in many countries. Previously, on May 3, the US Federal Reserve (FED) also decided to increase lending rates by 0.2% in an effort to curb inflation, despite recent instability in the banking sector. This is the 10th consecutive interest rate hike by the FED since March 2022.

However, economists have urged the FED to stop raising interest rates, saying that the recent turmoil in the banking market is due to the impact of the FED's consecutive interest rate hikes.

Meanwhile, the European Central Bank (ECB) also announced on May 4 that it would raise interest rates by 0.25% to 3.25%. This is the ECB's seventh consecutive rate hike since July 2022 to respond to persistently high inflation.

The decision came after inflation data showed that the headline inflation rate in the Eurozone rose to 7% in April. At the same time, core inflation (excluding food and energy prices) eased slightly to 5.6%.

In its latest forecasts, the ECB said that inflation in the Eurozone would average 5.3% in 2023, well above the bank's 2% target. It then forecast inflation to fall to 2.9% in 2024 and 2.1% in 2025./.

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