FRANKFURT (AFP, REUTERS) - The Bank of England (BOE) delivered the first back-to-back interest-rate increase since 2004 amid a growing cost-of-living crisis.
However, as expected, the European Central Bank (ECB) left rates at record lows, staying on track to provide copious stimulus this year even as inflation runs at a record high.
The BOE raised rates to 0.5 per cent on Thursday (Feb 4) and nearly half of its policymakers wanted a bigger increase to contain rampant price pressures, as the British central bank warned inflation will soon top 7 per cent.
In a surprise split decision, four of the nine members of the Monetary Policy Committee (MPC) wanted to raise rates by half a percentage point to 0.75 per cent in what would have been the biggest increase in borrowing costs since the BOE became operationally independent 25 years ago.
The majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase.
The pound jumped by around two-thirds of a cent against the US dollar to above US$1.36, its highest since Jan 20.
“Although a quarter point rise may have a limited impact on most firms, many will view back-to-back rate hikes, and four MPC members voting for a more significant rate rise, as a leap towards a sustained period of significant monetary tightening,” Suren Thiru, head of economics at the British Chambers of Commerce, said.
The BOE said consumer price inflation - which stood at 5.4 per cent in December - now looks set to peak at around 7.25 per cent in April, which would be the highest rate since the recession-ravaged early 1990s.
Earlier on Thursday, British energy regulators raised the maximum bill for typical household usage by around £700 (S$1,280) to nearly £2,000.
In contrast with the approach taken by the ECB, the BOE warned further “modest tightening” is in the pipeline, even though growth will be hurt by global energy and goods price inflation.
While the ECB’s decision to stand pat was expected, the pressure on it to tighten policy would grow “in the course of the year”, said Fritzi Koehler-Geib, chief economist at the German bank KfW.
ECB chief Christine Lagarde said on Thursday that eurozone inflation is likely to stay higher for longer than expected but is still set to come down later this year.
Official data on Wednesday showed that eurozone inflation soared to a record high of 5.1 per cent in January.
Any escalation in the conflict between Moscow and the West over Ukraine could cause prices to shoot up further.
In the United States, the Federal Reserve is expected to hike borrowing costs as many as seven times before 2023, with an initial 50-basis-point move pencilled in for March.