LONDON (BLOOMBERG) - The Bank of England (BOE) raised interest rates for a fifth straight meeting and sent its strongest signal yet that it is prepared to unleash larger moves if needed to tame inflation.
The nine-member Monetary Policy Committee voted 6-3 to increase the benchmark lending rate by 25 basis points to 1.25 per cent, the highest level since the global financial crisis in 2009. A minority of officials maintained their push for a move of double that size.
Policymakers led by BOE governor Andrew Bailey hinted that they may join a growing global trend for larger hikes if inflation continues to soar, saying "it would be particularly alert to indications of more persistent inflationary pressures, and would if necessary act forcefully in response".
Crucially, that language was endorsed by all the BOE's voters, a departure from May when two declined to sign up to guidance that more hikes were needed.
The bank also raised its forecast for the peak of inflation this year to "slightly above" 11 per cent, reflecting the planned increase in the energy price cap in October, and said it now expects the economy to contract in the current quarter. The pound declined against the dollar, dropping as much as 1.1 per cent to US$1.2042.
For now though, the BOE, which was the first major central bank to raise rates after the pandemic, is moving slower than some of its peers.
The US Federal Reserve raised interest rates by 75 basis points on Wednesday, the biggest increase since 1994. The Swiss National Bank also surprisingly hiked rates by 50 basis points earlier on Thursday (June 16).
The BOE "continues to balance the inflationary effects on the economy with the very real chance that they tighten too much and the UK economy lurches into a full-blown recession", said Mr Alan Custis, managing director at Lazard Asset Management.
But while the BOE is grappling with an inflation rate that has already hit a four-decade high of 9 per cent, officials are also concerned about an economic slowdown that is putting Britain at risk of recession.
Data this week showed the economy contracted in April, and officials now predict it will shrink 0.3 per cent in the second quarter, after previously expecting a 0.1 per cent expansion.
The longer-term outlook is also grim, with the Organisation for Economic Cooperation and Development saying this month that it sees no growth in Britain next year - the worst outlook among major nations.
The BOE's move stirred unease among some economists and business groups, which are concerned about a dimming outlook for the economy.
The British Chambers of Commerce said higher rates will "add further concern" on top of "soaring cost pressures and labour shortages", according to the lobby group's head of research David Bharier.
"It would seem somewhat short-sighted to keep chasing inflation upwards, especially if the consequence is deteriorating growth and the risk of recession," said Ms Melissa Davies, chief economist at Redburn, who dubbed the BOE's outlook "increasingly myopic".
To the BOE members backing a 25-basis-point move this month, including Mr Bailey, demand might be starting to slow.
The minutes of the meeting said there were "mixed signs" on the extent to which the living standards squeeze was weighing on consumer spending. Confidence has dropped but "indicators had held up".
Either way, the trend for higher rates is clear, threatening to heap more pain on an already creaking British economy that is dealing with surging tax, fuel and food bills, along with political turmoil and the messy repercussions of Brexit.
Adding to the misery, railway workers are due to hold three days of strikes next week, which economists say will cost the nation almost £100 million (S$170 million).