Bank of England Hikes Interest Rates in Bid to Battle Inflation

By Todd Crawford | December 16, 2021
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LONDON, ENGLAND - APRIL 10: Tulips begin to emerge outside the Bank of England on April 10, 2020 in London, England. The BOE stunned markets on Thursday with the first interest rate hike in years in a bid to limit inflation (Image: Dan Kitwood/Getty Images)

In an attempt to rein in inflation the Bank of England (BoE) on Thursday voted to raise interest rates to 0.25 percent from a record low of 0.1 percent, stunning economists who believed interest rates would hold in the face of uncertainty concerning the potential impacts of the Omicron variant. 

The BoE’s monetary policy committee (MPC) voted 8-1 to raise its key interest rate with only external member Silvana Teneyro voting against the hike. The BoE is the first central bank to adjust interest rates in the face of ballooning inflation. 

HSBC Asset Management macro strategist, Hussain Mehdi said, “The 8-1 vote to raise rates is fairly surprising, given the emergence of the Omicron variant and uncertainty over the near-term growth impact,” Business Insider reported.  

The rate hike comes as inflation exceeded the central bank’s projections. The BoE was prepared to accommodate a 2 percent increase in inflation however inflation has soared to a decade high of 5.1 percent. 

In theory, higher interest rates slows an economy, encourages savings and discourages spending which in turn lowers prices as businesses compete for what money consumers are willing to part with.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The MPC’s decision to hike Bank Rate today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation and the risk that inflation expectations would de-anchor if it did nothing.”

Markets quickly adjusted Thursday with the pound rising by 0.74 percent while the FTSE 100 stock index dipped slightly before rising by 1.03 percent. 

The surprise move comes after the U.S. Federal Reserve (Fed) indicated on Wednesday that several rate hikes are expected over the coming months as the central bank battles record high inflation as well. 

Gone is the idea that the current inflation, being experienced across the globe, is simply transitory in nature with the Fed projecting inflation to persist out to 2024. 

The Fed expects inflation in 2023 to be 2.3 percent and to dip slightly to 2.1 percent in 2024. 

While the Fed’s policy making committee left its benchmark rate near zero it now projects three rate hikes in 2022 up from one in its September forecast. Three additional rate hikes are expected in 2023 and two more in 2024. All in all interest rates are predicted to be at 2.1 percent by the end of 2024.