Bank of England hikes key rate by 50 basis points, will continue to respond ‘forcefully’ if needed

LONDON — The Bank of England on Thursday hiked its main interest rate by 50 basis points and signaled that more tightening will be needed to rein in inflation.

The Monetary Policy Committee voted 6-3 in favor of the half-percentage-point hike, which takes the bank rate to 3.5%. The rise marks a slowdown from November’s 75 basis-point increase.

“The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response,” the MPC said in its statement on Thursday.

“The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.”

The Bank now expects U.K. GDP to contract by 0.1% in the fourth quarter of 2022, 0.2 percentage points stronger than in its November Report.

Having hit a 41-year high in October, the annual rise in the U.K. consumer price index slowed to 10.7% in November, new figures revealed Wednesday.

The slowdown mirrored signs across other major economies such as the U.S. and Germany that inflation may have peaked, though it remains uncomfortably high and well above the Bank of England’s 2% target.

The central bank is trying to drag inflation back toward its target while also remaining sensitive to a weakening economy beset by several unique domestic pressures as well as global headwinds.

This was borne out in the latest U.K. labor market data, published earlier this week, which showed an uptick in both unemployment and wage growth, while economic inactivity and long-term illness rates also remain historically high.

The MPC said that while labor demand has begun to ease, the labor market remains tight. The unemployment rate rose slightly to 3.7% in the three months to October. Wage pressures are a key focal point as policymakers assess the inflation outlook.

“Vacancies have fallen back, but the vacancies-to-unemployment ratio remains at a very elevated level. Annual growth of private sector regular pay picked up further in the three months to October, to 6.9%, 0.5 percentage points stronger than the expectation at the time of the November Report,” it said.

The Bank also maintained its quantitative tightening targets, which include plans to reduce its balance sheet by £80 billion ($99 billion) over a 12-month horizon through £40 billion of active asset sales and ending reinvestments of maturing bonds.

This is a breaking news story and will be updated shortly.