The Bank of England raised interest rates to their prepandemic level on Thursday in an effort to combat rapidly accelerating inflation that has been worsened by the war in Ukraine.
The central bank raised rates by 25 basis points to 0.75 percent, the third consecutive increase at a policy meeting, as it lifted its forecasts for inflation. But the decision wasn’t unanimous as policymakers weighed the gloomier outlook for the British economy.
While the war has led to higher energy and commodity prices, pushing up the expected peak in inflation, it is also predicted to cut economic growth in Europe, including Britain. This creates a challenge for the central bank. Its goal is to bring inflation back down to its 2 percent target, but policymakers will want to avoid cooling the economy too aggressively and knocking the postpandemic recovery off course.
“The global economy outlook had deteriorated significantly following Russia’s invasion of Ukraine in late February, and the associated material increase in the prices of energy and raw material,” the bank said in a statement.
On Wednesday, the Federal Reserve raised U.S. interest rates for the first time since 2018 and projected six more increases this year as inflation soars. Last week, the European Central Bank moved closer to raising its benchmark interest rate when it proposed an end date for its bond-buying program.
“The economy has recently been subject to a succession of very large shocks,” the Bank of England said on Thursday. “Russia’s invasion of Ukraine is another such shock.” If energy and commodity prices stay high it will weigh on Britain’s economy. “This is something monetary policy is unable to prevent,” the bank added.
