By Andy Bruce and William Schomberg
LONDON (Reuters) - The Bank of England raised interest rates by a further quarter of a percentage point on Thursday but said it was ready to act "forcefully" to stamp out dangers posed by an inflation rate heading above 11%.
A day after the U.S. Federal Reserve raised rates by the most since 1994 with a 75 basis-point hike, the BoE stuck to its more gradual approach as it warned that Britain's economy would shrink in the April-June period.
The nine-strong Monetary Policy Committee voted 6-3 for the 25 basis-point hike in Bank Rate to 1.25%, the same breakdown as in May with the minority voting for a 50 basis-point increase.
The British benchmark rate is now at its highest since January 2009. It was the fifth time that the BoE has raised borrowing costs since December when it became the first major central bank to tighten monetary policy after the onset of the COVID-19 pandemic.
But some critics say it is moving too slowly to stop the rise in inflation from becoming entrenched in pay deals and inflation expectations, damaging the economy over the long term.
"The scale, pace and timing of any further increases in Bank Rate will reflect the Committee's assessment of the economic outlook and inflationary pressures," the BoE said.
"The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response."
The BoE dropped its guidance from May when it said most MPC members believed "some degree of further tightening in monetary policy may still be appropriate in the coming months".
Committee members Catherine Mann, Jonathan Haskel and Michael Saunders favoured a bigger, 50 basis-point increase, as they did in May.
Economists polled by Reuters had forecast a 6-3 vote to raise rates to 1.25% but investors increased their bets on a bigger move in recent days, with sterling plunging against the U.S. dollar and after reports that the Fed was considering its rare 75 basis-point move.
The BoE noted that the market path for British interest rates had risen materially since the May meeting, even though there had been relatively little news since then.
GLOBAL STRUGGLE
Central banks around the world are trying to show that they can contain inflation which is hitting levels not seen in decades, pushed up by the reopening of the global economy after the COVID-19 pandemic and then by Russia's invasion of Ukraine.
As well the Fed's move on Wednesday, last week the European Central Bank said it would push up borrowing costs in July for the first time since 2011 and would do so again in September, possibly by 50 basis points.
Earlier on Thursday, the Swiss National Bank raised its policy interest rate for the first time in 15 years by half a percentage point in a surprise move and Hungary's central bank unexpectedly raised its one-week deposit rate.
The BoE is raising rates even though it has warned of a sharp slowdown ahead for Britain's economy.
British consumer price inflation hit a 40-year high of 9% in April, more than four times the BoE's 2% target, and the central bank on Thursday raised its forecast to show it peaking slightly above 11% in October when energy bills go up again.
Britain's surge in inflation looks set to last longer than in many other economies, partly due to the delayed impact of its mechanism for domestic power tariffs but also because of the hit to trade from the country's departure from the European Union.
A chronic lack of workers to fill vacancies is worrying the BoE because it could lead to a jump in wages and turn the inflation surge into a longer-lasting problem.
A fall in the value of the pound in recent weeks, caused largely by the rise in interest rate expectations in the United States and the euro zone, threatens to add to the inflation pressure in Britain.
The BoE said sterling had been "particularly weak against the U.S. dollar".
It also downgraded its short-term forecasts for Britain's economy, saying it would shrink by 0.3% in the April-June period. It had predicted in May that there would 0.1% growth over the three months.
The forecast for a contraction in growth in the current quarter came despite the latest measures announced in late May by finance minister Rishi Sunak to help households hit by the jump in inflation.
The BoE said the measures could boost economic output by 0.3% and pushed up inflation by 0.1 percentage points in the first year.
The next scheduled announcement by the MPC is on Aug. 4.
(william.schomberg@thomsonreuters.com; +44 207 542 7778; Reuters Messaging: william.schomberg.reuters.com@reuters.net;