The Bank of England (BoE) announced that it has raised its benchmark interest rate by 0.5 percentage points to 5 per cent.

The decision was passed by the central bank’s Monetary Policy Committee with an overwhelming majority, Xinhua news agency quoted an official statement as saying.

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It has been the 13th consecutive rate hike since December 2021 as the central bank is battling stubbornly high inflation, bringing the interest rate to the highest since 2008.

The UK’s consumer price index (CPI) rose by 8.7 per cent in the 12 months to May, unchanged from April. This is 0.3 percentage points higher than expected in the BoE’s May report.

Core CPI, excluding the price of energy, food, alcohol and tobacco products, rose by 7.1 per cent in the 12 months to May, and inflation in the services sector jumped to 7.4 per cent, both reaching the highest level since March 1992.

The second-round effects in domestic price and wage developments generated by external cost shocks are likely to take longer to unwind than they did to emerge, the BoE said.

It added that there has been significant upside news in recent data that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand.

If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required, the BoE said.

Following the latest shock inflation reading, the BoE took more drastic action than predicted, said Richard Carter, head of fixed interest research at investment service provider Quilter Cheviot.

“Until inflation begins (descending) to more palatable levels, the Bank of England will continue to put the brakes on the economy,” Carter added.

The UK’s economy avoided recession at the start of this year, expanding by 0.2 per cent month on month in April and growing 0.1 per cent in the three months to April, according to official statistics.

But as stubbornly high inflation increased pressure on the central bank to further hike interest rates, concerns have grown over the economic outlook.

“With borrowing costs shooting up again and many more companies and consumers set to tighten belts, the prospects of the UK avoiding a recession look very slim,” said Susannah Streeter, head of money and markets at financial services company Hargreaves Lansdown.

UK housing markets have already felt the shock amid soaring mortgage rates.

The country’s average property price fell 1.0 per cent in May compared with the same period of last year, the first annual decline since 2012, mortgage lender Halifax said earlier this month.

The average two-year fixed mortgage now stands at 6.01 percent, compared with just 2.65 per cent in March 2022, and more than 14 million adults aged 20 and over have a mortgage, the Institute for Fiscal Studies (IFS) said Wednesday.

Interest rate hikes could see 1.4 million people in the UK lose 20 percent of their disposable income, the IFS added