The Bank of England raised UK interest rates by half a percentage point on Thursday, increasing them to 4% – the highest level since 2008. This move was more aggressive than the US Federal Reserve’s quarter-percent rate hike the day before.
The BoE had to make a difficult decision between fighting the near-41-year high of 10.5% inflation in December and the risk of a recession. The International Monetary Fund forecast the UK to be the only major economy to contract this year.
Meanwhile, the European Central Bank is also expected to raise rates for the 20 countries that use the euro by half a percentage point later on Thursday. Eurozone inflation, while falling in January, is still well above the ECB’s 2% target at 8.5%.
In comparison, the US inflation rate is beginning to abate, leading the Fed to slow the pace of its rate increases. The Bank of England, however, felt that the increased rate was necessary to ensure inflation does not spiral out of control.
The rate hike is likely to be far-reaching, affecting both businesses and consumers. Businesses may need to increase prices to cover higher borrowing costs, while consumers can expect to see higher mortgage costs and other loan payments.
