Bank of England raises UK interest rates to highest level since 2008

A woman walks in front of the Bank of England, at the financial district in London, on March 23, 2023. The Bank of England is set to raise interest rates later Thursday to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (AP Photo/Kin Cheung, File)

A man walks past the Bank of England, at the financial district in London, Thursday, May 11, 2023. The Bank of England is set to raise interest rates later Thursday to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (AP Photo/Frank Augstein)

The Governor of the Bank of England, Andrew Bailey, speaks at a press conference in London, Thursday May 11, 2023. The Bank of England raised interest rates to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (Henry Nicholls/Pool via AP)

The Bank of England's Governor Andrew Bailey, from left, Head of Media and Stakeholder Engagement Katie Martin and Deputy Governor, Markets and Banking, Dave Ramsden attend a press conference at the Bank of England, London, Thursday May 11, 2023. (Henry Nicholls/Pool via AP)

The Bank of England's Deputy Governor, Markets and Banking, Dave Ramsden speaks at a press conference in London, Thursday, May 11, 2023. The Bank of England has raised interest rates to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (Henry Nicholls/Pool Photo via AP)

The Bank of England's Governor Andrew Bailey, left, and Head of Media and Stakeholder Engagement Katie Martin attend a in London, Thursday, May 11, 2023. The Bank of England has raised interest rates to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (Henry Nicholls/Pool Photo via AP)

A man walks past the Bank of England, at the financial district in London, Thursday, May 11, 2023. The Bank of England is set to raise interest rates later Thursday to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (AP Photo/Frank Augstein)

View through a field of tulips at the Bank of England, at the financial district in London, Thursday, May 11, 2023. The Bank of England is set to raise interest rates later Thursday to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (AP Photo/Frank Augstein)

The Governor of the Bank of England, Andrew Bailey, speaks at a press conference in London, Thursday, May 11, 2023. The Bank of England has raised interest rates to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K. (Henry Nicholls/Pool Photo via AP)

LONDON (AP) — The Bank of England raised interest rates to their highest level since late 2008 as it continues to combat stubbornly high inflation in the U.K.

The decision on Thursday by the bank’s nine-member Monetary Policy Committee to lift its main interest rate by a quarter of a percentage point to 4.5% was widely anticipated in financial markets. The increase was its 12th in a row. Just two members of the panel voted to keep interest rates unchanged.

Like other central banks around the world, the Bank of England has sought to keep a lid on inflation, which over the past year has been fueled by Russia’s invasion of Ukraine. That sent energy prices soaring, a development that then led to price increases across a wide array of goods and services.

The Bank of England started raising interest rates in late 2021 from a low of 0.1% in order to keep a lid on price rises that were first largely stoked by bottlenecks resulting from the lifting of coronavirus lockdown restrictions and subsequently by Russia's war in Ukraine. Higher interest rates help lower inflation by making it more expensive for households and businesses to borrow, meaning they potentially spend less, thereby reducing upside demand pressure on prices.

The bank, which is tasked with keeping inflation at around 2%, said that inflation would likely halve from current levels to around 5% by the end of this year. Inflation will inevitably fall as the year-on-year energy price comparisons diminish.

Though the energy price backdrop will help lower inflation, the bank said food prices have stayed higher for longer than expected, partly because of Russia’s war in Ukraine and poor harvests in some European countries. As a result, it said inflation is expected to decline less rapidly this year than previously thought.

The interest rate hike will pile more pressure on borrowers, particularly those who have mortgages that track the bank's headline rate. Many homeowners will be cushioned from the recent increases because they fixed their mortgages when interest rates were ultra-low during the coronavirus pandemic. However, those whose fixed rate terms expire over the coming months will face much higher borrowing rates when they look to lock in new deals.

Unlike the United States where many homeowners fix their mortgage rates for 30 years, the prevailing habit in the U.K. is for homeowners to fix a rate for much shorter periods of time, at which time they move to their lender's usually higher variable rate or seek out other deals. So, in the current climate for example, those who fixed their mortgage rate at below 1% three years ago, may be seeing a fivefold increase in their rates.

The bank also said the British economy is likely to avoid falling into a recession this year — two consecutive quarters of negative growth — partly as a result of the recent fall in energy costs, a pickup in economic activity in China following the ending of its zero-COVID policy and a more benign environment in Europe than anticipated.

Despite the improved growth outlook, the bank isn't expecting a big rebound.

“The level of growth is still weak, let's be honest,” Bank of England Gov. Andrew Bailey told journalists following the rate decision.

Bailey said the bank was “not giving a directional steer” as to whether interest rates will rise again. Financial markets think there could be possibly one or two quarter-point increases in this current cycle, though much will depend on the speed at which inflation declines over the coming months.

“We are still minded to think that today’s hike will be the last of this tightening cycle,” said Luke Bartholomew, senior economist at asset management firm abrdn. “But the risks are skewed heavily towards higher rates, and inflation will need to behave itself over the coming months if policy is indeed to remain on hold at these levels."