The Bank of England increased its key interest rate by a bigger-than-expected half-point on Thursday. It did not follow the Federal Reserve's move of standing still for a meeting while it waits for more data.
Most economists expected a quarter-point move. It's the 13th consecutive increase after starting with rates close to zero in December 2021 and brings the benchmark to 5%.
The U.K. is coping with the worst inflation among the Group of Seven countries. The annual rate of price gains held at 8.7% in May, more than four times higher than the BOE's 2% target. By comparison, the U.S. inflation rate is around 4%.
The gap explains why the U.K. can't afford to mimic the Fed. Not only has headline inflation come down more slowly than anticipated, but services inflation is still picking up and wage gains are accelerating. That raises worries that inflation is becoming embedded in the economy, adding to the urgency of forceful action from the central bank.
Like the Fed, the BoE has warned that past interest-rate increases take time to have their full effect. That's particularly true in the U.K., where a substantial number of homeowners with mortgages will refinance imminently. Many two-to-five-year low-rate deals that were struck before rates started rising are coming up for renewal.
Separately, the central banks in Switzerland and Norway also increased interest rates on Thursday. The Norges Bank delivered a bigger-than-expected half-point move and it said plans to raise rates again in August.
Source : Marketwatch
