UPDATE - Bank of England hikes main interest rate to 5%, 15-year high

UPDATES WITH MORE DETAILS

By Aysu Bicer

LONDON (AA) - The Bank of England on Thursday raised UK interest rates by 50 basis points to a 15-year high of 5% to counter stubborn inflation, which remains unchanged at 8.7%, well above the main target of 2%.

This marks the 13th increase in UK interest rates in a row, going back to December 2021.

The decision exceeded market expectations, which had anticipated a smaller 25 basis point increase.

The bank said the impact of "domestic price and wage developments… were likely to take longer to unwind than they did to emerge."

"Twelve-month inflation fell from 10.1% in March to 8.7% in April and remained at that rate in May. This is 0.3 percentage points higher than expected in the May Report,” it said.

"Services CPI inflation rose to 7.4% in May, 0.5 percentage points stronger than expected at the time of the May Report, while core goods price inflation has also been much stronger than projected.”

The bank also acknowledged the lasting impact of external cost shocks on domestic prices and wages, which is expected to persist longer compared to their initial emergence.

"There has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand," it added.

The core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, rose to 7.1%, the highest since March 1992.

Jeremy Hunt, the Treasury chief, has expressed his support for the hikes.

"High inflation is a destabilizing force eating into pay cheques and slowing growth. Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later," said, Hunt, chancellor of the Exchequer.

Meanwhile, according to a member of UK Chancellor Hunt's economic advisory council, the Bank of England must create a recession to cushion inflation.

Karen Ward, also the chief market strategist for Europe, the Middle East and Africa at JP Morgan, stressed the emergence of a potential price-wage spiral, necessitating immediate action.

With inflation stubbornly high at 8.7% in May, Ward said that the central bank must address this growing concern and prevent the escalation of a price-wage spiral, which could exacerbate the inflationary pressures.