Amid Forecasts of Recession, Bank of England Raises Interest Rates

In Britain, there have been “significant developments” in fiscal policy since the bank’s last policy meeting six weeks ago, Thursday’s statement said. The day after the previous meeting, on Sept. 23., Ms. Truss’s finance minister, Kwasi Kwarteng, announced a series of unfunded tax cuts that set Britain’s fiscal policy on a collision course with the bank’s monetary policy.

Two weeks ago, Ms. Truss resigned, and her successor, Rishi Sunak, has made it clear that he intends to take a different approach to public finances. Later this month, he and the chancellor of the Exchequer, Jeremy Hunt, are expected to announce tax increases and spending cuts alongside a plan to cut Britain’s debt.

Since Britain changed leaders, a lot of the premium on bond yields — the extra amount buyers expected to be paid because of an increase in riskiness — has fallen, but not all of the impact from the recent bout of political and financial volatility has gone away, Mr. Bailey said. Liquidity in markets wasn’t back to where it was and “there has been a questioning of U.K. policy and that will have some lasting effect,” he added. “We have to work very hard to put that in the past.”

On Thursday the bank said that the fiscal measures that have been announced so far — including freezing energy bills, abolishing a health and social care tax, and reducing taxes on house purchases — would bolster demand more than the bank forecast three months ago.

Seven of the bank’s nine-person rate-setting committee, including Mr. Bailey, voted for the three-quarter point increase in interest rates, noting there were signs of firm inflation in domestic prices and wages that risked making high inflation being more persistent. For example, the labor market remains tight with more people than expected staying out of work, including because of long-term sickness, which was pushing up wages, though not enough to offset inflation.

The two others on the committee voted for a half-point and quarter-point increase each, arguing that the cost-of-living crisis warranted caution against over-tightening, and that monetary policy was already restrictive.

Among the causes for concern are rising mortgage payments. About 30 percent of British households have a mortgage and most of them have rates that are fixed for just two or five years. The bank said a quarter of mortgages, just over two million, were scheduled to reset their interest rate by the end of next year, which would raise mortgage costs “significantly” for those households.

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