LONDON (AP) 鈥� Fears that the British economy is heading for recession mounted sharply Thursday after the Bank of England raised borrowing costs by more than anticipated, seeking to combat with a hike that will hit borrowers hard, particularly homeowners who have to refinance in the coming months.
On a in Europe, the Bank of England said its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a fresh 15-year high of 5%. All but two on the panel backed the half-point increase.
The size of the bank's 13th hike in a row was a surprise, with most economists predicting a smaller quarter-point increase. Some even termed it a panic move given that there had been hopes as recently as last month that the bank would pause its rate-hiking cycle.
Financial markets are pricing in a potential rate peak of 6%, a level not hit since , after Bank Gov. Andrew Bailey warned of further increases .
鈥淲e are committed to returning inflation to the 2% target and will make the decisions necessary to achieve that,鈥� he said.
Clearly, the bank has been spooked by inflation failing to ease as fast as predicted from October's peak of 11.1%. Figures on Wednesday showed U.K. inflation unexpectedly holding steady at 8.7%.
in the U.K. than in other major economies, with many blaming the bank for being too slow to start raising borrowing rates and , which has added to import costs.
With wages rising fast, it's increasingly clear that high inflation has become .
鈥淲e know this is hard 鈥� many people with mortgages or loans will be understandably worried about what this means for them," Bailey said. 鈥淏ut if we don鈥檛 raise rates now, it could be worse later."
Across Europe, central banks also decided to push up borrowing costs Thursday, including the with a quarter-point hike and with a half-point increase. in a signal of a shift from unusual economic policies.
Banks around the world, from the to , have rapidly raised interest rates over the past couple of years to bring down inflation first stoked by supply chain backups tied to the rebound from the pandemic and then Russia鈥檚 invasion of Ukraine, which caused energy and .
The Fed has since paused but indicated this year.
Higher interest rates help lower inflation by making it more expensive for individuals and businesses to borrow, meaning they potentially spend less, reducing demand and pressure on prices.
The U.K. rate hike will pile further pressure on borrowers, particularly the 1.4 million or so households that will have to refinance their mortgages over the rest of the year. Those on variable mortgages, which track the bank's base rate, will face an imminent increase in their repayments. Renters, too, are facing increases.
鈥淭he rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency," warned Max Mosley, an economist at the National Institute for Economic and Social Research.
The increases will clearly come at a cost, and there are concerns over the outlook for the British economy, which has even as in the six months ending in March.
鈥淚t is increasingly difficult to see how the U.K. avoids a recession as part of the process of bringing inflation down," said Luke Bartholomew, senior economist at asset management firm abrdn. "And today鈥檚 large rate increase will probably be seen in retrospect as an important milestone towards that recession.鈥�
In a recession, unemployment would inevitably increase and home repossessions would become more prevalent 鈥� hardly the backdrop the Conservative government wants ahead of a likely general election next year. It is trailing the main opposition Labour Party in the polls.
Prime Minister Rishi Sunak, who has made halving inflation this year to around 5% his main priority, said he understood the 鈥渁nxiety鈥� people are feeling.
鈥淚鈥檓 here to tell you that I am totally, 100% on it, and it鈥檚 going to be OK, and we are going to get through this," he told workers at a warehouse in Dartford, just east of London.
Not everyone is convinced the bank is doing the right thing, arguing that previous interest rate increases have yet to work their way through the economy 鈥� there's always a lag.
"Pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes," said Paul Nowak, general secretary of the umbrella Trades Union Congress.
Pan Pylas, The Associated Press
