By KELVIN CHAN
AP Business Writer
LONDON (AP) — Britain’s central bank on Thursday raised its key interest rate again but toned down the pace as inflation shows signs of easing, mirroring action by the U.S. Federal Reserve and ahead of an anticipated identical move by European policymakers.
The Bank of England raised the benchmark rate by half a percentage point, to 3.5%, the highest level in 14 years. It was the ninth consecutive increase since December 2021 and follows last month’s outsized three-quarter point hike, the biggest in three decades.
This time, officials opted for less aggressive action after data this week showed inflation slipped from a 41-year high but warned that more hikes are likely to come.
The bank last month forecast a prolonged recession in the U.K. and consumer price inflation staying “very high” in the near term. Should that scenario play out, further rate increases may be needed to get inflation back to its 2% target, the bank said, adding that it “will respond forcefully, as necessary.”
Britain’s economy won’t slow as much as predicted in the final three months of the year but will still shrink by 0.1%, better than the 0.3% contraction predicted last month, policymakers said.
One big factor behind the need to keep raising rates is Britain’s persistent shortage of workers, according to the bank.
“The labor market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response,” it said.
At the same time, the bank noted that the job market’s “peak tightness” appears to have passed.
The Bank of England becomes the latest to fall in line with the Fed, which hiked its benchmark rate by the same amount Wednesday. Switzerland’s central bank followed suit with an identical move a day later, and the European Central Bank is expected to approve the same increase Thursday.
Norway’s central bank raised its key interest rate by a quarter-percentage point in a bustling week of central bank action.
Central banks worldwide have been battling to keep inflation under control, but Bank of England policymakers face extra pressure to strike the right balance because Britain’s economic outlook is worse than any other major economy.
The high cost of food and energy is eroding British households’ spending power while employers face pressure to boost wages to keep pace with inflation amid a nationwide wave of strikes by nurses, train drivers, postal workers, ambulance staff and others.
The Bank of England forecast last month that inflation would peak at around 11% in the last three months of the year, up from 10.1% in September. It said inflation should then start slowing next year, dropping below the bank’s 2% target within two years.
There were early signs that price spikes were easing, though inflation is still stuck near a 40-year high. Annual consumer price inflation dipped to 10.7% in November from 11.1% the previous month, according to official data released Wednesday.
“Overall, inflation has passed its peak and will continue to fall from here. That will prompt a sigh of relief” at the Bank of England’s headquarters, said Paul Dales, chief U.K. economist at Capital Economics.
But policymakers can’t be complacent because Britain’s economy is proving resilient and wage growth remains strong, he said in a research note.
“So interest rates are still going to be raised further, but the Bank will probably raise them at a slower rate” and they’ll top out at a lower-than-expected level, Dales said.
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