The UK central bank was one of the first central banks to raise interest rates in December 2021 and has now raised them tenfold in a row, to a level of 4%. This is the highest rate since 2008. The interest rate increase of 0.5 percentage points was in line with economists’ expectations.
Central bank policymakers have not been unanimous on the interest rate decision. Seven of the nine board members voted in favor of raising interest rates by 0.5 percentage point and two voted against further raising interest rates. The BoE also said that further rate hikes are likely to be needed if inflation remains elevated. The central bank is targeting a 2% inflation rate.
Strong price increases
Although UK inflation eased slightly to 10.5% in December, prices continue to climb sharply and many households in the country are being hit hard by the rising cost of living. The sharp price increases are also causing social unrest. For example, there are a lot of strikes in the UK in various sectors to force higher wages.
Central bankers believe the UK economy is already in a recession, but the economic downturn will be shorter than feared in November. The BoE now expects gross domestic product (GDP) to decline by almost 1% over the next five quarters. Previously, GDP was expected to decline by 2.9% over the next eight quarters. However, according to the central bank, the UK economy will not recover to pre-coronavirus levels until 2026 and 500,000 jobs will be lost in the meantime.