The Bank of England raised its key interest rate by 0.5% to 2.25%.

The Bank of England raised its key interest rate by 0.5% to 2.25%.

By Jeffrey Smith – The Bank of England raised its key 0.5% to 2.25%, the highest level in 14 years, as it continued to race toward its target despite the economic slowdown.

The bank also confirmed that it will start active sales of British government bonds in October, reducing the size of the portfolio it collected during the “quantitative easing” years.

The bank said the near-term outlook for inflation had improved, thanks to the new government’s plans to curb energy prices for households and businesses, but cautioned that it remained wary of continued pressures from a falling sterling and the still-strong labor market.

It now expects inflation to peak at just under 11% in October, earlier and lower than its previous forecast, but cautioned that it would take a few months to fall below 10%.

“By itself, the government’s guarantee of energy prices will decline and expose the expected peak of CPI inflation,” the bank said. “This may be expected to reduce the risk that a prolonged period of price inflation from abroad will lead to further persistent domestic price and wage pressures, although these risks remain substantial.”

He also referred to the government’s “financial event” on Friday, noting that this would materially alter growth and inflation expectations.

The committee warned that “if expectations indicate further persistent inflationary pressures, including from strong demand, the committee will respond aggressively, as necessary.”

The dollar lost about half a cent on the news to trade below $1.13, while the yield on benchmark government bonds rose by 5 basis points to 3.37%, touching an 11-year high recorded on Wednesday. The Bank of England’s decision to raise just 50 basis points, along with a 75 basis point hike on Wednesday, means that the premium on interest rates on the dollar has widened again, making it relatively more attractive.

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However, analysts said the difference in position was justified, given the UK’s weaker economic outlook. Samuel Tombs, an analyst at Pantheon Macro Economics, said in a note to clients that it “provides reassurance that it is focusing on expectations of CPI inflation – which has improved since last – and evidence of an emerging stagnation in the economy, rather than with arbitrarily keeping pace with neighbors.”

Three members of the nine-member Monetary Policy Committee – Jonathan Haskell, Katherine Mann and Dave Ramsden – voted for a larger 75 basis point increase, but the new MPC member, Swati Dingra, voted to raise rates by only 25 basis points.

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