London (CNN Business)The Bank of England is hiking interest rates in an effort to fight surging prices even as the Omicron variant engulfs the United Kingdom and threatens to put the economy into reverse.
The central bank’s Monetary Policy Committee said Thursday that it would raise interest rates from the record low of 0.1% to 0.25%, the first such move by any major central bank since the start of the pandemic.
UK consumer price inflation surged to 5.1% in November, its highest level in more than a decade, leaving the economy at risk of stagflation, a toxic mix of weak growth and rising prices. December is shaping up to be the weakest month for the economy since February, according to an estimate of business activity published Thursday.
The Bank of England said it expects prices to rise further.
“Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022,” the central bank said in a statement on Thursday. Energy costs and pay rises would play a big part in driving inflation higher next year, it added.
Economists and investors had expected the Bank of England to raise interest rates in November in order to combat rising prices. But the central bank surprised observers by holding its fire, making a December hike all but certain until recent days, when Omicron began to spread rapidly.
Higher official interest rates can raise the cost of borrowing for businesses and households, as well as encouraging people to save more, thereby helping to reduce demand and inflation. But they can also take some of the heat out of the economy.
With inflation running two and a half times above the central bank’s 2% target, price concerns overshadowed worries about the potential of the Omicron variant to damage the economy.
“Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage,” the Bank of England said.
The world’s most influential central banks responded to the pandemic with massive stimulus efforts. But their approaches are now diverging, with the US Federal Reserve signaling three rate hikes next year while the European Central Bank is expected to maintain looser policy.
The US Federal Reserve announced Wednesday that it will wrap up its stimulus program faster than originally announced, and its updated economic projections show multiple interest rate increases in 2022.
Fed Chair Jerome Powell acknowledged that there’s a risk that the pandemic-era inflation will stick around for longer than initially expected.
“One of the reason the behind our move today is to put us in a position,” to deal with inflation, Powell said.
–This is a developing story and will be updated.
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