50-basis-point rate hike to tackle persistent inflation

LONDON — The Bank of England on Thursday surprised markets with a 50 basis point hike to interest rates, its 13th consecutive increase as policymakers grapple with persistently high inflation.

The Monetary Policy Committee voted 7-2 in favor of the half-percentage–point increase, which takes the Bank’s base rate to 5%. The move defied market expectations, which had priced in around a 60% chance of a 25 basis point hike.

Fresh data on Wednesday showed annual U.K. consumer price inflation was 8.7% in May, unchanged from the previous month, cementing market expectations that the MPC would opt for another hike. Economists also upped their expectations for further monetary tightening in the future.

Most worryingly for the central bank, core inflation — which excludes volatile energy, food, alcohol and tobacco prices — was 7.1% year-on-year in May, up from 6.8% in April and marking its highest rate since March 1992.

Policymakers are walking a tightrope as they attempt to tighten monetary policy sufficiently to quell inflationary pressures without triggering a full-scale mortgage crisis and recession.