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Aug. 3 (UPI) — The Bank of England has raised its lending rates to 5.25%, the highest in 15 years, with indications that further increases may be necessary to bring inflation back to the target rate of 2%.
Last year, inflation in the British economy reached double digits and currently stands at 7.9% over the 12-month period to June. This is significantly higher than the peer economies and above the target rate set by the British central bank.
The bank announced on Thursday that its rates would remain “sufficiently restrictive” until the target rate is achieved.
“Some of the risks of more persistent inflationary pressures may have started to materialize,” added the bank.
The emphasis on restrictive monetary policy contrasts with the approach of the U.S. Federal Reserve, which stated that it would assess incoming data before making decisions on future rate movements. However, the Fed did raise its lending rate by 0.25% last month.
Similar to other economies, British central bankers are concerned about wages and labor, as these factors can incentivize inflation through increased cash and demand.
“Wage growth is expected to remain strong in the near term, with a risk of further positive surprises,” said the Bank of England.
Last month, British Prime Minister Rishi Sunak committed to reducing consumer-level inflation, but only to a certain extent. Despite being the highest among advanced economies, Sunak pledged to bring it down to half the 11.1% it reached in October 2022, which sparked criticism from the opposition Labor Party.
While trends in Britain’s inflation are worse than in other major economies, the bank’s rate hike was less aggressive compared to the 50 basis-point increase in June.
“Policymakers clearly don’t want to appear complacent, and there are references to the upside risks associated with inflation, as well as recent surprises in wage growth,” according to a research note from investment bank ING.
