Il Nuovo Postiglione - BoE hikes rate half-point over stubborn inflation

The higher-than-expected hike to a 15-year peak was the 13th increase in a row, but sparked fears over the soaring cost of commercial loans for Britons already hit by the crunch in living standards.

That spelled fresh gloom for Prime Minister Rishi Sunak's Conservative government, which is well behind the main opposition Labour party in opinion polls before a general election due next year.

The UK's inflation rate is the highest among G7 rich nations.

- 'We know this is hard' -

"We've raised rates to five percent following recent data which showed that further action was needed to get inflation back down," said Bank of England (BoE) governor Andrew Bailey, who voted to hike in its regular policy meeting.

"We know this is hard -- many people with mortgages or loans will be understandably worried about what this means for them. But if we don't raise rates now, it could be worse later."

The announcement came one day after official figures showed UK annual inflation held at 8.7 percent in May, defying expectations of a slowdown.

Prior to the data, markets had expected a smaller quarter-point increase.

Thursday's move brings the BoE's rate to the highest level since the 2008 financial crisis.

The half-point lift was in stark contrast to the Federal Reserve, which last week pressed pause on its rate hikes after a sharp easing in US inflation.

The European Central Bank last week raised eurozone borrowing costs by a quarter-point to reach the highest level in 22 years.

Both the Fed and the ECB flagged more hikes.

The Norwegian, Swiss and Turkish central banks also ramped up rates on Thursday.

Sunak, who has made slashing the pace of price rises a priority for his government, defended the BoE's latest hike but conceded that it was "hard" for cash-strapped Britons.

"The reason interest rates are going up is because inflation is too high and we've got to bring it down," he told a business event.

"This is something that makes everybody poorer -- that's what inflation does. That's why we've got to reduce it."

Traders anticipate UK interest rates will hit six percent by the end of the year, and could push Britain into recession according to some analysts.

Sunak wants inflation reduced to five percent by the end of the year, or about half the level of the start of 2023.

The BoE began lifting interest rates from a record low of 0.1 percent at the end of 2021, with inflation starting to creep up as economies slowly emerged from Covid lockdowns.

But UK inflation went on to strike a 41-year peak at 11.1 percent in October on rampant energy bills, after key oil and gas producer Russia invaded Ukraine in early 2022.

Core inflation, which strips out food and energy costs, spiked in May to 7.1 percent -- the highest in more than three decades.

- 'Big bazooka' -

Two of the bank's nine policymakers voted Thursday for no change, arguing in a statement that "the energy price shock and other global cost-push shocks" such as surging food prices would continue to reverse this year.

"Bank of England policymakers are feeling the heat... with core inflation increasingly hot and sticky, which is why they've opted to super-size the rate hike," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

"Investors are trying to assess whether today's big bazooka now, might be enough to stem further rate hikes or whether more will still be necessary."

Commercial lenders tend to match the central bank's rate moves on their home loans.

As a result, UK loan rates and rents are surging, biting deep into disposable incomes while pay rises fail to keep pace with inflation.

The hikes have also sent the UK government's long-term borrowing costs soaring.

However, Britons who can afford to save benefit from increased fixed returns on investments.

The BoE is tasked by the government with keeping UK annual inflation close to a target of two percent.

M.Vacanti--INP