The Bank of England has raised the UK’s interest rate to 3%, the highest it has been pegged in the past 33 years.
This is the eighth time in a row that the central bank of the United Kingdom has hiked interest rates.
On Thursday, the bank’s monetary policy committee (MPC) voted by a majority of seven to two, to increase the base rate of interest by 0.75 percentage points.
The MPC blamed higher energy prices and a tight labour market for the decision to increase rates.
“Inflation is too high, and it’s the bank’s job to bring it down,” the bank’s governor, Andrew Bailey said at a press conference after the announcement. “If we do not act forcefully now it will be worse later on.”
As the Bank of England raises borrowing costs to cap rising prices, Britain’s economy is expected to suffer.
The central bank believes economic output is already contracting, and its latest projection is for the recession to continue through the first half of 2024 “as high energy prices and materially tighter financial conditions weigh on spending.”Compared to past UK recessions, gross domestic product is forecast to remain weak compared to pre-recession levels for a “prolonged” period, Bailey said.
A two-year recession would be longer than the one that followed the 2008 global financial crisis, though the Bank of England said that any declines in GDP heading into 2024 would likely be relatively small.
The British pound fell sharply after the announcement, dropping 2% against the US dollar to $1.117. It also dropped 1.2% against the euro.
