UK Base Interest Rate Hiked to 5% with a Big Step... Inflation Strengthens, Raising Peak Forecasts

The Bank of England raised its benchmark interest rate by a larger-than-expected margin.

The Bank of England (BOE) in London, United Kingdom / Photo by Yonhap News

The Bank of England (BOE), the central bank of the UK, raised the benchmark interest rate by 0.5 percentage points to 5.0% at its monetary policy meeting on the 22nd (local time). This marks the highest level in 15 years since the global financial crisis of 2008.

Financial markets had widely expected a 0.25 percentage point increase. However, after the Office for National Statistics announced that the consumer price inflation rate for May was 8.7% annually?higher than the forecast of 8.4%?expectations for a 0.5 percentage point hike surged. Inflation has exceeded forecasts for four consecutive months.

Since December 2021, when the BOE was the first major economy to begin tightening, it has continuously raised the benchmark interest rate from the historic low of 0.1%. Despite this, inflation has not easily slowed, leading markets to raise their projections for the peak interest rate.

There are even forecasts that the rate could reach 6% annually, the highest since 2001. Karen Ward, an economist at JP Morgan, said that to curb inflation, it might be necessary to raise rates further and induce a recession.

As interest rates rise, the burden of mortgage interest payments has increased. The UK’s mortgage rates are reset every two years, with a large number scheduled for renewal by the end of this year. The think tank Institute for Fiscal Studies (IFS) warned the previous day that the disposable income of 1.4 million mortgage holders could decrease by more than 20%.

This poses a risk for Prime Minister Rishi Sunak, who must hold a general election before the end of next year. Just before the BOE’s interest rate announcement, Sunak emphasized through a spokesperson the importance of controlling inflation, stating, “I continue to support BOE Governor Andrew Bailey. We will continue to cooperate with the BOE.”

Meanwhile, the U.S. Federal Reserve (Fed) held its benchmark interest rate steady this month, and the European Central Bank (ECB) raised its rate by 0.25 percentage points last week. The central banks of Switzerland and Norway raised their rates by 0.25 and 0.5 percentage points respectively on the same day, signaling further hikes.