Bank of England raises UK interest rates to pre-pandemic levels

Bank of England governor Andrew Bailey
The UK interest rate hike from the Bank of England is the third increase since December, and the start of the coronavirus pandemic. Photo: Dan Kitwood/Reuters

The Bank of England (BoE) has raised UK interest rates on Thursday back to their pre-pandemic levels of 0.75% as it looks to dampen soaring inflation.

The decision means that borrowing costs have been hiked for the third meeting in a row, and comes despite the economic uncertainty surrounding Russia’s invasion of Ukraine.

In a move that was widely expected, the Monetary Policy Committee (MPC) voted by a majority of 8-1, with deputy governor Sir Jon Cunliffe dovishly wanting to maintain the rate at 0.5%.

It is the third increase since December, and the start of the coronavirus pandemic, after the BoE became the first major central bank to take the plunge.

The MPC first increased rates from record lows of 0.1% to 0.25% in December, then in February it then doubled the rate to 0.5%, the first back-to-back hike since 2004.

Four of the nine MPC members voted for a 50 basis point tightening last month, but were narrowly outvoted by five who backed a 25bp raise.

Read more: How will the Bank of England react to the UK's inflation-wage dilemma?

It comes as UK inflation hit a fresh 30-year high of 5.5% in the year to January. The consumer prices index reading from the Office for National Statistics (ONS) last month was the highest since March 1992, when it stood at 7.1%, climbing further above the Bank of England’s (BoE) 2% target.

The central bank warned earlier this month that consumer price inflation could peak at about 7.25% by April when a 54% surge in energy bills is due to take effect. However, it now believes inflation could hit as high as 8% in second quarter of this year.

"If sustained, the latest rise in energy futures prices means that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022," it said.

"This could temporarily push CPI inflation around the end of this year above the level projected for April, which was previously expected to be the peak."

Paul Craig, portfolio manager at Quilter Investors warned that a double digit inflation rate was "not off the cards".

Watch: How does inflation affect interest rates?

UK inflation is still being dominated by energy prices, which has been exacerbated by the Ukraine conflict, and the prices of a select number of goods, which were heavily affected by the pandemic.

In its minutes on Thursday, the BoE condemned Russia’s invasion of Ukraine, and the suffering caused by the war.

"The Bank of England condemns Russia’s unprovoked invasion and the suffering inflicted on Ukraine. The Bank is working closely with the UK government to support its response in coordination with international authorities. The bank’s Monetary Policy Committee supports this condemnation and welcomes these actions."

Read more: What higher inflation means for savers and investors

Ben Laidler, global markets strategist at eToro, said: "The bank is increasingly caught between a rock and a hard place as it faces both soaring inflation and slowing economic growth.

“Rising prices will continue to pile pressure on the bank, with Wednesday’s inflation report set to rise towards 6%, but likely not peaking until nearer 8%. Growth concerns are also mounting, with GDP forecasts falling to under 4%, as consumers are squeezed by the cost-of-living crisis, tax rises, and now higher interest rates.

“Financial markets are expecting the BoE to hike rates to over 2% by the end of this year. We do not think that will be possible. This would cushion equities but undermine sterling.”

Watch: Will interest rates stay low forever?