The Bank of England raised borrowing costs on Thursday, becoming the world's first major central bank to do so since the coronavirus pandemic battered the global economy, as it warned that inflation would likely reach 6% in April, three times its target level.

In a second surprise in six weeks, the Bank of England stated that it was compelled to act despite the outbreak of the Omicron coronavirus in the United Kingdom, due to warning signs that underlying inflation pressures could become sustained.

"The labor market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures," the BoE said. "Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage."

Bank of England raises interest rates to 0.25% - BBC News

The majority of economists expected the Bank of England's Monetary Policy Committee to maintain the Bank Rate at 0.1% in the wake of the Omicron variant of the coronavirus causing a record number of COVID-19 cases in the United Kingdom on Wednesday.

"The MPC's decision to hike Bank Rate today, before it knows the full extent of the economic damage wrought by the surging Omicron variant, underlines how worried it is about the outlook for inflation and the risk that inflation expectations would de-anchor if it did nothing," Pantheon Macroeconomics analyst Samuel Tombs said.

The nine-member MPC voted 8-1 to raise Bank Rate to 0.25% from 0.1%, with external member Silvana Tenreyro providing the only dissenting voice. The MPC pointed to the likelihood of further rate hikes ahead.

"The Committee continues to judge that there are two-sided risks around the inflation outlook in the medium term, but that some modest tightening of monetary policy over the forecast period is likely to be necessary to meet the 2% inflation target sustainably," it said.

Omicron Hit

The Bank of England lowered its growth forecasts for December and the first quarter of 2022 due to Omicron, which could result in "an extremely high number of infections in a very short period."

A closely watched survey of purchasing managers released earlier on Thursday indicated that hospitality and travel businesses took a hit this month, pushing private sector growth to a 10-month low.

However, the BoE stated that the UK and global economy were in a "materially different" state than they were at the start of the pandemic, with inflation now at an all-time high.

It emphasized "upside risks" associated with pay trends and stated that there was little evidence of an increase in unemployment following the end of the government's job-supporting furlough program on Sept. 30.


Market Reaction

Following the BoE's rate announcement, the British Pound saw strong movement towards the upside, the Euro weakened against the British Pound and the FTSE 100 ticked towards the downside.