LONDON -- The Bank of England raised its key interest rate Thursday by another half-percentage point to the highest level in 14 years, but despite facing inflation that outpaces other major economies, the central bank avoided more aggressive increases made by the U.S. Federal Reserve and others.
The half-point increase serves as 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 held off on acting more boldly as they predicted a second consecutive drop in economic output this quarter, an informal definition of recession.
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 former 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 new measures have eased uncertainty over energy costs and are "likely to limit significantly further increases" in consumer prices, the U.K. policymakers said. They expected inflation -- now at 9.9% -- to peak at 11% in October, lower than previously forecast.
"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 bank signaled that it is prepared to respond more forcefully at its November meeting, if needed. The 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 increased rates Wednesday by three-quarters of a point for the third consecutive time and forecast that more large increases were ahead.
Three of the British bank's nine committee members wanted a similar three-quarter-point raise but were outvoted by five who preferred a half-point increase and one who voted for a quarter-point addition.
The decision "suggests the Bank of England is concerned about the U.K.'s economic deteriorating outlook amid the looming threat of recession," said Victoria Scholar, head of investment at interactive investor. "The timid increase will do little to stem the slide in sterling but may avoid inadvertently inducing unnecessary pain for the economy which is already grappling with slowing demand and deteriorating confidence."
Surging inflation is a worry for central banks because it saps economic growth by eroding people's purchasing power. Raising interest rates -- the traditional tool to combat inflation -- reduces demand and therefore prices by making it more expensive to borrow money for big purchases like cars and homes.
U.K. inflation hit 9.9% in August, 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.
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 November meeting.
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 official estimates showed output fell by 0.1% in the previous three-month period.
The weakness partly reflects a smaller-than-expected rebound after an extra June holiday to celebrate the queen's 70 years on the throne and the impact of another public holiday Monday for her funeral, officials said.
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 Russia's war in Ukraine.
This month, the European Central Bank delivered its largest-ever rate increase with a three-quarter point increase for the 19 countries that use the euro currency.
But British policymakers signaled they will "respond forcefully, as necessary" if there are signs that inflationary pressure is more persistent than expected, "including from stronger demand."
The bank said it's also moving ahead with plans to trim its bond holdings built up under a stimulus program, selling off $90 billion worth of assets over the next year to bring its portfolio down to $854 billion.
AROUND THE WORLD
The U.S. Federal Reserve has been the most aggressive in using interest rate increases to cool inflation that is battering households and businesses this year.
This week, central banks around the world followed suit to varying degrees, using different economic tools to tame rising prices that are not isolated to the U.S.
Following are actions taken Thursday, and also earlier this week, by central banks globally:
Turkey: The Central Bank of the Republic of Turkey lowered the benchmark rate by 1 percentage point to 12%. The lira was trading around 18.38 against the dollar, weakening further than the previous record low of 18.36 in December.
Japan: The Bank of Japan left its benchmark lending rate at minus 0.1% and its ultra-loose monetary policy unchanged, but the bank later intervened in the market to stem the yen's decline against the U.S. dollar, which has been rising against other currencies because of the aggressive actions of the U.S. Fed.
Philippines: The Bangko Sentral ng Pilipinas is increasing its benchmark overnight borrowing rate by 50 basis points, a half-point increase, to 4.25%. The corresponding lending rate is going up by the same amount, meaning it's reached 4.75%.
Switzerland: The Swiss National Bank carried out the biggest increase ever to its key interest rate. The Swiss rate increased from minus 0.25% to 0.5%, ending several years of negative interest rates.
Norway: The Norges Bank raised its key policy interest rate by a quarter-percentage point to 2.25%.
Sweden: Sweden's central bank Tuesday raised its key interest rate by a full percentage point. The bank raised its policy rate to 1.75% and said it will keep tightening over the next six months as it tries to bring inflation back to its target of 2%.
Information for this article was contributed Kelvin Chan and staff of The Associated Press.
Pedestrians walk past The Bank of England in London, Thursday, Sept. 22, 2022. Britain's central bank is under pressure to make another big interest rate hike Thursday. Inflation in the United Kingdom is outpacing other major economies, but the U.S. Federal Reserve and other banks are moving faster to get prices under control. (AP Photo/Kirsty Wigglesworth)
A view of The Bank of England in London, Thursday, Sept. 22, 2022. Britain's central bank is under pressure to make another big interest rate hike Thursday. Inflation in the United Kingdom is outpacing other major economies, but the U.S. Federal Reserve and other banks are moving faster to get prices under control. (AP Photo/Kirsty Wigglesworth)
Pedestrians walk past The Bank of England in London, Thursday, Sept. 22, 2022. Britain's central bank is under pressure to make another big interest rate hike Thursday. Inflation in the United Kingdom is outpacing other major economies, but the U.S. Federal Reserve and other banks are moving faster to get prices under control. (AP Photo/Kirsty Wigglesworth)
Pedestrians walk past The Bank of England in London, Thursday, Sept. 22, 2022. Britain's central bank is under pressure to make another big interest rate hike Thursday. Inflation in the United Kingdom is outpacing other major economies, but the U.S. Federal Reserve and other banks are moving faster to get prices under control. (AP Photo/Kirsty Wigglesworth)
A view of The Bank of England in London, Thursday, Sept. 22, 2022. Britain's central bank is under pressure to make another big interest rate hike Thursday. Inflation in the United Kingdom is outpacing other major economies, but the U.S. Federal Reserve and other banks are moving faster to get prices under control. (AP Photo/Kirsty Wigglesworth)