LONDON, AP – The Bank of England has raised interest rates for the second time in three months, putting the United Kingdom far ahead of the rest of Europe and the United States in moving to tame surging inflation that is squeezing consumers and businesses.
The bank’s monetary policy committee voted 5-4 to raise rates from 0.25 per cent to 0.5 per cent – marking the first back-to-back rise since 2004, coming after a quarter point increase at its last meeting in December.
Four of the nine members called for a steeper rate increase – to 0.75 per cent – to help put the brakes on rampant inflation.
It also said it would stop reinvesting the proceeds from maturing securities in the 875 billion pounds ($A1.7 trillion) of UK government bonds it has purchased to bolster the economy since the global financial crisis more than 10 years ago.
In the UK, consumer prices rose 5.4 per cent in the year through December, the highest inflation rate in almost 30 years.
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The squeeze is only going to get worse with household energy prices jumping by more than 50 per cent in April and income taxes set to rise by 1.5 per cent the same month.
The bank’s decision comes a week after the US Federal Reserve said it would end its own asset purchases in March and was likely to raise interest rates for the first time in more than three years.
Monetary policymakers around the world are trying to contain inflation fuelled by rising energy prices and supply shortages as the global economy recovers from the COVID-19 pandemic.
In contrast, the European Central Bank does not plan to raise rates until 2023 despite record inflation, blaming it on temporary factors.
But it has decided the economic recovery is strong enough for it to start carefully dialling back some of its stimulus efforts over the next year.
It also meets on Thursday.
Investors expect the Bank of England to raise its key rate three times this year, pushing the rate to 1.0 per cent by August.
The bank adjusts interest rates as it tries to keep the inflation rate below 2.0 per cent while also promoting economic growth.
Higher interest rates increase how much borrowers pay on everything from home mortgages to credit card purchases, reducing spending and slowing price increases.
Lower rates tend to encourage spending and increase economic growth.
The Bank of England began buying UK government bonds and corporate bonds held by financial institutions in 2009 to pump money into the economy during the global financial crisis.
Policymakers were forced to turn to asset purchases after they had slashed interest rates to 0.5 per cent, limiting their ability to use interest rates to stimulate economic growth.
with reporting from PA