UK central bank's rate hike prompts recession concern

Bank of England raises interest rate to 5.25 percent in bid to control inflation

The Bank of England hiked interest rates for the 14th consecutive time on Thursday, reaching a new 15-year peak, as it continues to battle steep price increases in the United Kingdom.

The central bank raised the UK's interest rate to 5.25 percent, marking the highest base rate since April 2008.

Bank of England Governor Andrew Bailey said the increase was a crucial component to reducing the UK's high inflation rate toward its 2-percent goal. However, some critics remain skeptical about the effectiveness of the approach, with concerns growing it could trigger a recession.

In a news briefing on Thursday, Bailey said: "Inflation is falling and that's good news. We know that inflation hits the least well-off hardest and we need to make absolutely sure that it fall all the way back to the 2-percent target. That's why we've raised rates to 5.25 percent today."

The cost-of-living has been growing at a slower rate for the past two months, but inflation remains at nearly 8 percent, four times higher than the official target.

Economists had said the cost-of-living figures meant policy makers would not need to increase interest rates as much as previously estimated, and some believe the cycle of hikes could be approaching its end, possibly capping at 5.75 percent this year.

The Bank of England, or BoE, seeks to curtail spending by making borrowing costlier, which should lead to households purchasing fewer items, ultimately easing price increases.

However, it's a delicate balance, as escalating rates too harshly could lead to an economic slump, while failing to raise them could potentially amplify inflation further.

In June, the BoE made a 0.5-percent interest rate hike when inflation didn't decrease as anticipated but stayed steady at 8.7 percent for the year leading up to May. Yet, in the ensuing month, inflation fell more substantially than forecasted, down to 7.9 percent.

The Institute of Economic Affairs, a free-market think tank, had suggested the BoE should allow the effects of prior interest rate increases to materialize before considering further hikes.

"It will take some time for previous rate rises and falling global commodity prices to feed into lower inflation," said Trevor Williams, a member of IEA and former chief economist at Lloyds Bank.

"Further rate rises are unnecessary and could do some economic damage without lowering inflation any faster. The UK economy is on the precipice of a sharper slowdown," he said.

Both the US Federal Reserve and the European Central Bank raised rates last week.

But escalation in prices has subsided to 3 percent in the US and 5.3 percent in the 20 nations that use the euro, and both are thought to be closer to pausing their rate hikes compared to the UK, reported the Associated Press.

Some economists attribute the UK's elevated inflation to Britain's departure from the European Union, and its impact on trade and business costs.

Others criticize the BoE for its delayed response in raising interest rates, which allowed inflation to permeate the economy, particularly affecting wages. Consequently, UK households are struggling with soaring mortgage rates and rents.