Britain’s central bank raised its key interest rate
Thursday by another half-percentage point to the highest level in 14 years, but
it avoided more aggressive steps to tame inflation that the U.S. Federal
Reserve and other banks have taken.

It is the Bank of England’s seventh straight move to
increase borrowing costs as rising food and energy prices fuel a cost-of-living
crisis that is considered the worst in a generation. Despite facing a slumping
currency, tight labor market and inflation near its highest level in four
decades, officials decided against acting more boldly as they predicted a
second consecutive drop in economic output this quarter, a long-held informal
definition of recession.

Also Read | Why interest rates are being hiked globally?

The bank matched its half-point increase last month — the
biggest in 27 years — to bring its benchmark rate to 2.25%. The decision was
delayed for a week as the United Kingdom mourned Queen Elizabeth II and comes
after new Prime Minister Liz Truss‘ government unveiled a massive relief
package aimed at helping consumers and businesses cope with skyrocketing energy
bills.

The measures eased uncertainty over energy prices and are
“likely to limit significantly further increases” in consumer prices,
the bank’s policymakers said. They expected inflation to peak at 11% in
October, lower than previously forecast.

Also Read | Joe Biden at UNGA says Russia shamelessly violated UN charter

“Nevertheless, energy bills will still go up and,
combined with the indirect effects of higher energy costs, inflation is
expected to remain above 10% over the following few months, before starting to
fall back,” the monetary policy committee said.

The U.K. decision comes during a busy week for central bank
action marked by much more aggressive moves to bring down soaring consumer
prices.

The U.S. Federal Reserve hiked rates Wednesday by
three-quarters of a point for the third consecutive time and forecast that more
large increases were ahead. Also Thursday, the Swiss central bank enacted its
biggest-ever hike to its key interest rate.

Also Read | How the US Fed rate hike will impact you?

Surging inflation is a worry for central banks because it
eats away at consumers’ purchasing power. The traditional tool to combat
inflation is raising interest rates, which reduces demand and therefore prices,
by making it more expensive to borrow money.

Inflation in the United Kingdom is running at 9.9%, close
to its highest level since 1982 and five times higher than the Bank of
England’s 2% target. The British pound is at its weakest against the dollar in
37 years, contributing to imported inflation.

To ease the crunch, Truss’ government announced it would
cap energy bills for households and businesses that have soared as Russia’s war
in Ukraine drives up the price of natural gas needed for heating.

Also Read | Is it better to invest in real estate during surging inflation?

The Treasury is expected to publish a
“mini-budget” Friday with more economic stimulus measures, and the
bank said it won’t be able to assess how they will affect inflation until its
next meeting in November.

The Bank of England expects gross domestic product to fall
by 0.1% in the third quarter, below its August projection of 0.4% growth. That
would be a second quarterly decline after an Office of National Statistics
estimate that output had fallen by 0.1% in the second quarter.

Also Read | The 2008 market crash: Inside the doomsday machine and a brief history

The bank avoided pressure to go bigger even as other banks
around the world take aggressive action against inflation fueled by the global
economy’s recovery from the COVID-19 pandemic and then the war in Ukraine.

This month, Sweden’s central bank raised its key interest
rate by a full percentage point, while the European Central Bank delivered its
largest-ever rate increase with a three-quarter point hike for the 19 countries
that use the euro currency.