Bank of England hikes interest rates by an outsized 75 basis points for the first time in over 30 years
- The Bank of England on Thursday raised interest rates by 75 basis points to 3%.
- The rate hike, the UK central bank's eighth in a row, is its biggest since 1989.
The Bank of England raised interest rates by a jumbo-sized 75 basis points for the first time in over three decades on Thursday, as it continues to try to clamp down on red-hot inflation in the British economy.
The BoE lifted interest rates to 3%, the highest level since the 2008 financial crisis. Seven members of the Monetary Policy Committee voted for a 75 basis-point hike at the bank's November meeting, while two backed a smaller rise.
The 0.75-point increase marks the most aggressive tightening from the UK central bank since 1989. The BoE has now raised rates eight times since February in a bid to tame soaring inflation, which hit a 40-year high of 10.1% in September.
The move comes after the Federal Reserve on Wednesday delivered another 75 basis point rate hike, taking the target range for the federal funds rate to between 3.75% and 4% — the highest policy rate since 2008.
The BoE estimated that the UK fell into a recession in the third quarter of this year, and it warned that the current downturn will likely last until the middle of 2024.
"The MPC's latest projections describe a very challenging outlook for the UK economy," it said in its November report. "It is expected to be in recession for a prolonged period."
"GDP is expected to decline by around 3/4% during 2022 H2, in part reflecting the squeeze on real incomes from higher global energy and tradable goods prices," it added.
The UK economy will continue to shrink throughout 2023 and the first half of 2024, with households reining in spending as it becomes more difficult and expensive to access finance.
"The Bank of England had little choice but to deliver on the market's expectations of a 75 basis point hike at today's meeting," JPMorgan market strategist Hugh GImber said in a research note. "Such a large hike may appear unwarranted given signs that UK activity is already contracting, but there is scant evidence as yet that the slowdown is sufficient to tame inflation."
"A more modest hike today, when inflation is pushing further into double digits and following strong action from both the Federal Reserve and the European Central Bank, would have risked reigniting questions about the Bank's credibility and further volatility in sterling markets," he added.
The British pound fell after the BoE's announcement, down 0.48% to $1.1202 as of 9.03 a.m. ET, having traded at $1.1256 ahead of the release. London's FTSE 100 stock index was 0.04% lower.
The pound slumped to an all-time low against the dollar at $1.0327 in late September after then Prime Minister Liz Truss's newly instated UK government pledged to cut taxes and step up borrowing. The currency rallied in October for its best month in a year, but many analysts believe it will weaken in coming months given the UK's economic challenges.
The mini budget sparked a period of political and economic turmoil that forced the BoE to step in to make emergency government bond purchases temporarily to stabilize markets and avert a pension fund collapse.
A new government led by Prime Minister Rishi Sunak made a series of U-turns on the tax plans, meaning the BoE was no longer called upon to counter the extra inflationary pressures from the proposed tax plan. New finance minister Jeremy Hunt is scheduled to publish his first budget on November 17.
"With fiscal policy now set to be a lot tighter despite warnings about raising tax rates into a slowdown, the scope for the Bank of England to be more aggressive is expected to be more limited in the longer term, due to concerns about the impact on demand," Hewson said.
This story has been amended to add detail on the BoE's view of the economy and to reflect that two BoE officials voted for a smaller rise.