Bank of England hikes interest rates to 4% as it steps up its inflation battle

Feb. 2 (UPI) -- The Bank of England hiked interest rates by 0.5% Thursday saying the country's tight labor market and stronger-than-expected domestic price and wage pressures indicated inflation was a greater threat than higher borrowing costs.

The bank's governor, Andrew Bailey, however, told reporters that there were signs inflation had ''turned the corner."

"We think it will continue to fall this year and more rapidly in the second half of the year, Bailey said.

The central bank's Monetary Policy Committee voted by a majority of 7-2 to increase Bank Rate by 50 basis points to 4%. Two members preferred to maintain Bank Rate at 3.5%, BoE said in a news release.

In following suit from yesterday's rate rise by the U.S. Federal Reserve, which hiked its benchmark federal funds rate by 0.25% to 4.5%, its highest level since October 2007, British interest rates are now at their highest level in 14 years.

It stressed that the rise was in line with the overarching monetary policy goal of achieving its 2% inflation target, but in a way that helps to sustain growth and employment.

The increase, the tenth time the bank has raised rates since December 2021, was in line with expectations with little apparent effects on markets.

The FTSE 100 share index was up 0.61% at 7,809 points midway through Thursday's trading session, while the pound was down 0.5% against the dollar and the euro at $1.23 and €1.12 respectively.

But the move sparked angry reactions from opposition parties.

Labor's shadow chancellor, Rachel Reeves, told the BBC ''it was the failure to respect economic institutions and the mini-budget last year that has contributed to so much of this mess.''

The Liberal Democrats said it was "a hammer blow to anyone with a mortgage, or whose rent will be upped as a result of this increase".

Downing Street described the decision as "difficult" for those with mortgages but said it supported the action taken by the bank because reducing inflation was the priority.

The bank said that domestic inflationary pressures have been firmer than expected, with both private sector regular pay growth and services CPI inflation notably higher than forecast in the November Monetary Policy Report.

''The labor market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output,'' said the bank.

It added that the MPC's updated projections showed the country's 10.5% inflation rate falling to around 4% near the end of the year as the sharp price increases in energy and other goods driving subside. It said that alongside lower inflation the projected decline in output would be much shallower than forecast in its November report.

The bank also hinted at future cuts saying while many central banks have continued to tighten monetary policy, ''market pricing indicates reductions in policy rates further ahead.''

The MPC's next rate decision is expected March 23.