LONDON — Britain s central bank hiked its key interest rate by another half-percentage point Thursday, avoiding more aggressive steps to tame inflation that the U.S. Federal Reserve and other banks have taken.
It is the Bank of England's seventh straight move to increase borrowing costs as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation. Despite a slump in the currency, tight labor market and inflation near its highest in four decades, officials decided not to act boldly as large hikes threaten to tip the economy into recession.
The bank brought its benchmark rate to the highest level in 14 years at 2.25% last month despite its half-point increase last month, the biggest in 27 years. The decision was postponed for a week as the United Kingdom mourned Queen Elizabeth II and came after the new Prime Minister Liz Truss announced a cap on spiraling energy bills for households and businesses.
The energy relief package means consumer prices will peak at 11% in October, lower than previously expected, according to the bank's monetary policy committee.
Inflation is expected to remain above 10% over the next few months, but energy bills will still go up, and the indirect effects of higher energy costs will be seen as the reason why it will fall back, according to the bank.
The U.K. decision comes after a busy week for central bank action marked by more aggressive moves to bring down consumer prices. The Federal Reserve hiked rates by three-quarters of a point for the third consecutive time and forecast that more large increases would be ahead, according to the U.S. Federal Reserve.
The Swiss central bank enacted its biggest-ever hike to its key interest rate on Thursday.
Inflation is a concern for central banks because it eats away at consumers purchasing power. It's possible to reduce demand and therefore prices by raising interest rates, which makes it more expensive to borrow money.
In the United Kingdom, inflation is close to its highest level since 1982 and five times higher than the Bank of England's 2% target since 1982, inflation in the United Kingdom is 9.9%. The British pound is at its lowest level against the dollar in 37 years, contributing to imported inflation.
Since then, Truss government has unveiled a massive relief program for energy bills that have soared as Russia's war in Ukraine has helped drive up the price of natural gas needed for heating. The measures mean inflation will peak at a lower level and fall faster next year, according to economists.
The Bank of England avoided pressure to go bigger even as other banks around the world took aggressive action against inflation fueled by the global economy recovering from the Covid 19 epidemic and then the war in Ukraine.
Sweden's central bank raised its key interest rate by a full percentage point this month, while the European Central Bank delivered its largest rate increase this month, with a three-quarter increase for the 19 countries that use the euro currency.