The 0.25 point increase, the fourth increase in a row decided by the British central bank, brings the key rate to 1%.

The Governor of the Monetary Institute Andrew Bailey acknowledged "the hardship this will create for many people across the UK, particularly those on lower incomes, (...) most affected by rising oil prices. 'energy and food'.

The day before, the American Federal Reserve (Fed) had raised its key rates by 0.5 points, catching up to fight inflation compared to the BoE, which began to act at the end of 2021, while the European Central Bank ( BCE) plans to follow suit.

"Global inflationary pressures have intensified severely after Russia's invasion of Ukraine" and will affect British households in October with a rise in regulated electricity prices of 40%, explained the BoE in the minutes of its meeting.

Result: Inflation is expected to peak at "just over 10%" in the fourth quarter, well above the 2% target by the British Monetary Institute, and the economy will shrink with the fall in the purchasing power of households from the end of 2022.

These announcements caused the pound to plunge, down more than 2% to 1.2360 dollars around 3:15 p.m. GMT.

Bank of England's more modest move than US Federal Reserve is helping to weaken the pound, analysts Tolga Akmen say AFP/Archives

"The message is that there will be a need for a less harsh monetary policy to calm inflation than what the market expected", with sluggish growth in activity taking care of slowing the rise in prices, comments Daniel Vernazza, economist at UniCredit.

The market was anticipating a rate hike of up to 2.5% in the coming year.

But for the BoE, raising rates so much would weigh on activity so much that it would at the same time stifle inflation, which would then fall well below its target of 2% in 2024.

Powerlessness

In February, the BoE was still expecting a 1.25% increase in gross domestic product (GDP) in 2023. It now anticipates a contraction of 0.25% next year.

Given the way the electricity market is regulated in the United Kingdom, with changes twice a year, "consumer price inflation (...) could come down later" than elsewhere in the world , warns the BoE.

If prices remain at a high level, this "will inevitably weigh on the real incomes of households in the United Kingdom, and on the margins of companies established there", warns the BoE.

“Monetary policy cannot do anything about this,” she adds, believing that its “role is to ensure that this change occurs in a way that is compatible with its objective of 2% inflation”.

For the monetary institute, the challenge is to prevent these shocks from translating into long-term price and wage increases.

“Most Committee members believe that a further degree of upside in the coming months may be appropriate,” according to the minutes.

The subject of the cost of living is at the center of local elections being held in the UK on Thursday, with Prime Minister Boris Johnson vowing to do 'everything possible' as the opposition scoffs at his 'out of touch' approach .

Boris Johnson at 10 Downing Street in London, May 5, 2022 Daniel LEAL AFP

Unite union general secretary Sharon Graham on Thursday denounced the rate hike, which she said "adds financial pressure on ordinary families, on loans and rents".

The International Monetary Fund (IMF) had revised its forecast for the British economy sharply downwards a few days ago, saying it expected the United Kingdom to experience the weakest growth in the G7 next year.

© 2022 AFP