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“The latest rise in gas prices has caused a further significant deterioration in the outlook for activity” in Britain and the rest of Europe, policymakers said, according to the minutes of this week’s meeting. Britain “is now expected to enter a recession”.

The rate change announced Thursday was the sixth increase since December as the bank tries to tackle inflation, which is at its fastest pace in four decades. It has come under pressure to raise rates by more than its usual quarter-point move as inflationary pressures persist and other major central banks also take more aggressive steps to halt price increases.

The Bank of England was the first major central bank to start raising rates in response to the fight against global inflation, as it tightened monetary policies that supported economies during the pandemic. Last month, the European Central Bank raised interest rates for the first time in more than a decade. And in the United States, the Federal Reserve last week raised rates by three-quarters of a percentage point for the second month in a row.

Banks can’t do much to slow energy prices or mitigate supply chain disruptions, but their goal is to ensure that rapid price increases don’t last too long by making more expensive for consumers and businesses to borrow money. Unemployment has so far remained generally low in the United States, the European Union and Britain, but the risk is that in trying to bring inflation down, policymakers will cause deep recessions and layoffs. The International Monetary Fund warned last month that a global recession could be at hand.

Global inflation has been exacerbated by the war in Ukraine and Western sanctions on Russia which have further disrupted supply chains and driven up the cost of energy.

“There is an economic cost to war,” Andrew Bailey, the bank’s governor, said Thursday. “But that won’t stop us from setting monetary policy to bring inflation back to the 2% target.”

In Britain, consumer prices rose 9.4% in June from a year earlier, faster than inflation in the United States and the euro zone.

The National Institute for Economic and Social Research, a London-based think tank, said on Wednesday the economy entered recession in this quarter and would lose 1% of gross domestic product over three quarters.

“We are really in stagflation here,” said Stephen Millard, deputy director of the research institute, before the bank’s decision. As high inflation meets recession, household incomes are squeezed because wage growth is not keeping up with rising prices. The research institute has called for more government support for low-income households as food prices continue to rise and household energy bills rise, possibly by as much as 75% at the moment. fall.

The Bank of England’s own forecasts are even gloomier. Next year the economy will contract by 1.5%, he predicted, assuming no change in fiscal policy. It shows the scale of the economic challenge facing the two Tory lawmakers battling for party leadership and the role of prime minister. Much of the debate so far has focused on taxes, with frontrunner Liz Truss promising to cut them quickly for workers and businesses amid a cost of living crisis.

Ms Truss also said she would reassess the government bank’s mandate to ensure price stability, to ensure “it matches some of the world’s most effective central banks at controlling inflation”. The central bank has been independent of the Treasury since 1997, but the government still sets the inflation target. Ms. Truss added that it had been a long time since the terms of reference had been reviewed.

Mr Bailey avoided getting embroiled in speculation over a new term at a press conference on Thursday. “I will not comment on anything said by the candidates for the leadership of the Conservative Party.”

Even as the economic outlook deteriorates, the central bank has emphasized its primary objective of reducing inflation. Eight of the nine members of the rate-setting committee voted in favor of the outsized measure amid signs that inflationary pressures were becoming more persistent and emerging in more and more parts of the economy.

“The mix of near-term high inflation and weak activity leading to a recession provides a difficult backdrop for monetary policy,” but the focus should remain on inflation and inflation expectations, said Mr Bailey.

The inflation picture quickly deteriorated. In December, when the bank first raised rates, it predicted inflation would peak at 6% in April. Now that peak is six months later and more than twice as high. Rising energy prices are a key reason for rapid inflation, the bank said, but supply chain disruptions and domestic inflationary pressures are also rising.

Inflation for consumer services, which are much less affected by the world price of goods, rose 5.2% in June from a year earlier, the highest since the start of 1993. The market for strained labor also drives up inflation. Unemployment is low and vacancies are plentiful, so underlying wage growth is rising as employers compete to hire and retain staff. Meanwhile, companies are passing on more of their cost increases to their customers.

Although some factors contributing to inflation are showing signs of easing, such as global commodity prices, policymakers have taken only limited comfort from these signals. There is a risk that a longer period of inflation generated by external factors, such as global energy prices and pandemic-related supply chain disruptions, will lead to “longer lasting” pressures on prices and wages in the country, according to the minutes. This is one of the reasons for the higher than usual rise in interest rates.

There are “unusually large” risks around the bank’s economic and inflation forecasts, Mr Bailey said. But inflation is expected to fall back towards the bank’s target in two years, based on financial market expectations of future interest rate movements. As the bank produced its forecast, markets expected rates to rise to 3% in the first half of next year and then fall.

Policymakers are likely to raise rates more cautiously than markets are expecting because the dominant force driving prices higher — natural gas prices — is beyond the control of monetary policy, said Martin Beck, economic adviser at EY. , in a note to customers. These higher energy prices will eventually reduce demand and therefore cause prices to fall, he added.

While the bank is using higher interest rates as its main tool to contain inflation, in the background, it is also reversing one of its main policies that has helped support the economy during the pandemic: the purchase of bonds. Through December, the bank increased its holdings of UK government bonds to £875 billion, but has since stopped reinvesting proceeds from maturing bonds, which has allowed its balance sheet to shrink.

Next month, it plans to take a step it has never taken before and start reselling bonds in the market. It plans to sell around £10bn of bonds every quarter for the first year, if market conditions are right and policymakers vote to start the process.

With so much uncertainty about the economy and prices, the bank offered fewer clues about the future path of interest rates, stressing, as other central banks have done recently, that its decisions will be based on the latest data.

“Politics is not on a predefined path,” the minutes read.