U.K. poised to enact biggest interest rate hike in 3 decades

The U.K. central bank may opt to raise rates by as much as 1 percentage point to show it is serious about tackling inflation

The Bank of England is expected to announce its biggest interest rate increase in three decades on November 3 as it seeks to beat back stubbornly high inflation fueled by Russia’s invasion of Ukraine and the disastrous economic policies of former Prime Minister Liz Truss.

Economists expect the bank to boost its key rate by at least three-quarters of a percentage point, to 3%, after consumer price inflation returned to a 40-year high in September. Plus, wholesale natural gas prices, while down from their August peak, are likely to rise again this winter, driving up energy bills and further fueling a cost-of-living crisis.

The interest rate decision is the first since Ms. Truss’ government announced 45 billion pounds ($52 billion) of unfunded tax cuts that sparked turmoil on financial markets, pushed up mortgage costs and forced Ms. Truss from office after just six weeks. Her successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills.

The rate increase will likely be the Bank of England’s eighth in a row and biggest since 1992. It comes after the U.S. Federal Reserve on November 2 announced a fourth consecutive three-quarter point jump as central banks worldwide tackle inflation that is eroding living standards and slowing economic growth.

The U.K. central bank may opt to raise rates by as much as 1 percentage point to show it is serious about tackling inflation after facing criticism for being slow to react earlier this year, said Luke Bartholomew, senior economist at abrdn.

“The Bank of England will try to look through the volatility caused by the government’s policy and gas price movements, and focus on underlying inflation pressure,’’ Mr. Bartholomew said in a note to investors. “However, given the impact on household spending of such large inflationary moves, and the risk to inflation expectations, it adds a further complication to an already very difficult policy decision for the bank.”

Central banks have struggled to contain inflation after initially believing that price increases were being fueled by international factors beyond their control. Their response intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.