Bank of England hikes interest rates to 13-year high, sees inflation hitting 10%

BOE Governor Andrew Bailey has warned the Bank is walking a “narrow path” between growth and inflation.

The Bank of England raised interest rates to their highest level in 13 years in a bid to tackle soaring inflation.

In a widely expected move, policymakers at the BOE voted for a fourth consecutive rate hike since December at a time when millions of U.K. households are grappling with skyrocketing living costs.

The Monetary Policy Committee of the Bank approved a 25-basis point increase in the base interest rate. The members in the minority preferred to raise their interest rates by half a percentage point.

Like many central banks around the world, the BOE is tasked with steering the economy through an inflation surge that has been exacerbated by Russia's unprovoked onslaught in Ukraine.

The annual inflation rate in the U.K. hit a 30-year high of 7% in March as food and energy prices continued to surge. The U.K. consumer confidence plummeted to a near record low in April.

The Bank expects U.K. inflation to go up by 10% this year due to the Russia-Ukraine war and China's actions. The cost of living crisis is likely to get worse because prices are likely to rise faster than income.

The Bank's Monetary Policy Committee said that inflationary pressures have intensified sharply following Russia's invasion of Ukraine.

Andrew Bailey implied that the Bank may look to take a more incremental approach to tightening rather than following the Fed.

The U.S. central bank raised its benchmark interest rate to a target range of between 0 and 1%. It was the Fed's biggest rate hike in two decades and its most aggressive step yet in its fight against inflation.

Shortly after the rate decision, sterling traded down 1.2% at $1.2468. The U.K. currency fell to its lowest level since July last year.

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The Bank said that GDP growth is expected to slow sharply over the first half of the forecast period.

In its February report, the Bank said that the U.K. gross domestic product was likely to have risen by 0.9% in the first quarter.

The unemployment rate fell to 3.8% in the three-month period through to February, and is expected to fall further in the coming months.

The combination of slower growth and higher inflation is a challenge for many policymakers, and is reflected in today's split vote.

With inflation set to remain higher for longer in the future, the policy tightening is in autopilot mode.

Energy prices and China lock ups are key risk factors, but there is scope for inflation to cool later this year and the impact of a significant household income squeeze on growth could eventually push the bank on a more dovish path.