The Bank of England has today raised interest rates by the most in 27 years, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.
Reeling from a surge in energy prices caused by Russia's invasion of Ukraine, the Bank of England's Monetary Policy Committee voted 8-1 for a half percentage point rise in the Bank Rate to 1.75% - its highest level since late 2008 - from 1.25%.
The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.
MPC member Silvana Tenreyro cast a lone vote for a smaller 25-basis-point increase.
The Bank of England warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s but far less than the hit from Covid-19 and the downturn caused by the 2008-09 global financial crisis.
The UK economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis.
Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3% in October - the highest since 1980 - due mostly to the surge in energy prices following Russia's invasion of Ukraine.
That would leave households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.
British consumer price inflation hit a 40-year high of 9.4% in June, already more than four times the Bank of England's 2% target.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
This has triggered industrial action and is putting pressure on whoever succeeds Boris Johnson as Britain's next prime minister to come up with further support.
The bank had previously expected inflation to peak at above 11% and almost no growth in Britain's economy before 2025 at the earliest.
In its new forecasts, the Bank of England saw inflation falling back to 2% in two years' time as the hit to the economy took its toll on demand.
The British central bank has now raised rates six times since December but today's move was the biggest since 1995.
The pressure on Governor Andrew Bailey and colleagues to move in larger steps intensified after recent big rate hikes by the US Federal Reserve, the European Central Bank and other central banks.
Those moves weakened the value of the pound, which can add to inflation.
The Bank of England repeated that it was ready to move forcefully if needed to stem more persistent inflationary pressures.
But it stressed that there were "extremely large" uncertainties about the economy - which could make the slowdown more or less severe than its core forecasts - and it would judge what its next moves should be as events unfold.
"Policy is not on a pre-set path," the Bank of England said today.
"The scale, pace and timing of any further changes in Bank Rate will reflect the Committee's assessment of the economic outlook and inflationary pressures," it added.
Bank of England Governor Andrew Bailey said today that returning British inflation to the 2% target was an absolute priority, and said all options were on the table at future policy meetings.
"Returning inflation to the 2% target remains our absolute priority. There are no ifs and buts about that," Bailey said at a news conference.
"All options are on the table for our September meeting and beyond that," he added.
On top of everything else, the Bank of England's inflation-fighting record has been called into question by Liz Truss, the front-runner to be Britain's next prime minister.
She wants to set "a clear direction of travel" for monetary policy and to review the Bank of England's mandate.
The Bank of England also said today it expected to start selling down its huge stockpile of government bonds, with active sales of around £10 billion a quarter, shortly after its next meeting in mid-September.
The gilt holdings peaked at £875 billion in December and have since fallen to £844 billion after the bank stopped reinvesting the proceeds of maturing bonds in February.
UK finance minister confident Britain can overcome economic challenges
British finance minister Nadhim Zahawi said he was confident the country was taking the right actions to overcome global economic challenges, after the Bank of England hiked rates and warned inflation would top 13%.
"Along with many other countries the UK is facing global economic challenges and I know that these forecasts will be concerning for many people," he said in a statement.
"I'm confident that the action we are taking means we canalso overcome these global challenges," he added.
"Addressing the cost of living is a top priority and we havebeen taking action to support people through these tough times," Zahawi said in today's statement.
"We are also taking important steps to get inflation under control through strong, independent monetary policy, responsibletax and spending decisions, and reforms to boost our productivity and growth," he stated.