The Bank of England (BOE) raised interest rates in the United Kingdom (UK) yesterday to combat surging consumer prices which are threatening to put its economy in reverse, becoming the first central bank among the world’s leading economies to do so since the novel coronavirus pandemic began.

The BOE increased its key policy rate to 0.25 per cent from the record low of 0.1 per cent in a move which surprised the market, given the rapid spread of the omicron variant of the coronavirus across the UK, which is already hurting many businesses, particularly those in the hospitality sector.

But with consumer price inflation running at 5.1 per cent, more than double the bank’s target of two per cent, the vast majority on the bank’s rate-setting Monetary Policy Committee decided action was needed now. For many households struggling with rising prices, it’s likely to be another hit to their incomes, at least in the short term, with mortgages and loans set to increase, too.

Minutes of the BOE’s decision showed that eight of the nine members of the rate-setting panel backed the increase in an attempt to keep a lid on inflation, which bank staff think could peak at around six per cent in April as a result of the delayed impact on energy bills, given the spike in wholesale gas prices.

Meanwhile, the European Central Bank (ECB) decided simultaneously not to abruptly pull back pandemic support for the euro-area economy as the new omicron variant of COVID-19 stirs uncertainty about a recovery, despite inflation hitting record highs and the US indicating on Wednesday that it will be speeding up its stimulus exit.

The cautious approach comes as the 19 European Union member countries using the euro already are seeing the economic rebound slow because of a rise in infections from the delta variant and shortages of parts and raw materials. That has held back an economy that depends on trade and supply chains.

The bank confirmed that it will phase out its euro 1.85 trillion (US$2.1 trillion) pandemic bond purchase stimulus on schedule next year but will maintain some of the effect by moving part of the purchases to another support programme.

The bond purchases drive down longer-term borrowing rates and aim to keep financing affordable so businesses can get through the pandemic slowdown.

Analysts don’t expect a first ECB interest rate increase from record lows until well into 2023.

In contrast to the ECB, the US Federal Reserve decided to speed up its exit from pandemic crisis support, saying it would reduce its monthly bond purchases at twice the pace it had previously set and will likely end them in March. That puts the Fed on a path to start raising rates as early as the first half of next year.

In the eurozone, inflation is well above the European bank’s goal of two per cent, but bank officials and many economists say the spike in consumer prices is temporary and will likely ease next year. The bank’s most recent staff projections foresee inflation of only 1.5 per cent in 2023.

It’s a different situation than that faced by the Fed, where US stimulus and infrastructure spending on top of a robust rebound in growth have resulted in stronger inflation pressures.

The eurozone economy grew 2.2 per cent in the third quarter from the previous quarter, but economists say that pace has already slowed significantly due to parts shortages and higher virus cases that discourage face-to-face indoor activity and add burdens on travel.

The ECB said it would end its pandemic support programme in March, as expected, but would add stimulus to another programme that has been purchasing 20 billion euros of bonds per month. Those monthly purchases will be boosted to 40 billion euros in the second quarter and 30 billion euros in the third quarter. The programme would then revert to 20 billion but would then would run for “as long as necessary,” an open-ended commitment.