LONDON — The Bank of England is hiking base interest rates from 0.5 percent to 0.75 percent due to persistent growth in inflation exacerbated by Russia’s invasion of Ukraine, it announced Thursday.
The monetary policy committee voted by 8 to 1 for the increase, with deputy Governor for Financial Stability Jon Cunliffe favoring holding rates steady.
Inflationary pressure, already high, is growing due to the war, as prices of key commodities — from food to gas to oil to metals — have all skyrocketed. In turn, this trend is hitting economic growth and living standards in countries dependent on raw material imports such as the U.K., the Bank said in its monetary policy report.
“The effects of Russia’s invasion of Ukraine would likely accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes,” the Bank warned. “It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly.”
Meanwhile, British gross domestic product is expected to “slow to subdued rates during the course of this year,” while inflation will stand at 8 percent by the end of June “and perhaps even higher later this year,” according to the report. That compares to 5.5 percent in January.
Individuals will feel a “materially larger” impact on real aggregate income than the roughly 2 percent decline projected in February, the Bank said.
“The economy has recently been subject to a succession of very large shocks,” the Bank said, recalling the COVID-19 crisis, which the U.K. had recovered well from, particularly as far as the labor market is concerned. “Russia’s invasion of Ukraine is another such shock,” it concluded.
The Bank also condemned Russia’s invasion and the suffering inflicted on Ukraine and said it’s working closely with the U.K. government “to support its response in coordination with international authorities,” the report said.