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Bank of England hikes interest rates again as it struggles to tame inflation

The monetary policy committee raised interest rates on Thursday by a further 25 basis points

The Bank of England's (BoE) monetary policy committee (MPC) raised interest rates on Thursday by a further 25 basis points, taking the bank rate from 4.25% to 4.5%, as expected by the markets.

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The rise will put more pressure on households struggling with the cost of living and will also mean higher mortgage payments for some. While people looking for loans will face higher borrowing costs. However, higher interest rates also means savers can benefit.

The MPC also updated its inflation projections in its May Monetary Policy Report and said it was expected to fall to around 5% by the end of this year – and to keep falling next year to meet its 2% target by late 2024.

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“One of the main causes of today’s inflation is Russia’s invasion of Ukraine. It led to a big rise in the price of gas and some food basics like wheat. Higher prices for goods from abroad also played a big role,” the report said.

“There is also pressure on prices from developments at home. Businesses are charging more for their products because of the higher costs they face. There are lots of job vacancies, and employers are having to offer higher wages to attract job applicants. Prices for services have risen markedly,” the report also highlighted.

Read more: FTSE 100 and European stocks higher as BoE hikes rates again

Struggle to tame inflation

It comes as Britain has struggled to bring down the highest rates of inflation among the G7 group of advanced economies.

Official data showed inflation in March was running at 10.1% – well above the BoE’s forecast made in February when it expected an easing to 9.2%.

The latest increase in the cost of borrowing represents the 12th successive boost by the central bank since it started raising rates in December 2021.

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Giles Coghlan, chief market analyst, consulting for HYCM, commented: “With wage growth data coming in hotter than expected a few weeks ago, fears of a wage-price spiral have only grown since March and the economy has not cooled to the extent that Bank of England policymakers will have hoped.

“Right now, core inflation remains sticky at 6.2% year-on-year and investors should expect rates to go higher in the summer even if headline inflation falls sharply, particularly as the markets are now expecting a terminal rate of 4.85%. On a brighter note, the BoE is not forecasting a recession for the UK and has revised GDP up for next year to 0.75% from a prior projected fall of -0.25%.”

The BoE decision comes in the wake of the US Federal Reserve and European Central Bank also raising rates.

Market reaction

Following the BoE rate decision, the markets responded, as Victoria Scholar, head of investment at Interactive Investor, noted.

“Sterling rebounded off the day’s lows following the Bank of England’s rate hike, but it remains in negative territory in today’s session against the US dollar.

“The pound had been rallying close to a one-year high this week in anticipation of the central bank’s rate decision and thanks to improved inflation data in the United States, which catalysed weakness for the greenback on Wednesday. Cable (GPBUSD)’s gains turned red this morning, although the MPC’s rate hike tempered those declines,” Scholar said.

Meanwhile, the FTSE 100 turned negative after the announcement, partly driven by sterling, which pared back earlier declines.

Watch: Rising prices fuel anger in Austria as inflation continues to hurt consumers

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