LONDON: The Bank of England raised its key interest rate to 2.25% from 1.75% on Thursday and said it would continue to “respond forcefully, as necessary” to inflation, despite the economy probably already being in a shallow recession.

The central bank cut its forecast for the peak in British inflation to just under 11% from more than 13%, following Prime Minister Liz Truss’s plan to cap energy prices, but warned that the policy could create longer-term price pressures.

Economic demand was likely to be stronger thanks to the energy price cap, the BoE said, but in the immediate term it cut its forecast for the three months to September to show a fall of 0.1%, down from growth of 0.4% forecast in early August.

The drop is partly due to the extra public holiday for Queen Elizabeth’s funeral. Combined with a fall in output in the three months to June, these two successive quarters of contraction meet the common definition of a technical recession.

The BoE rate rise follows the US Federal Reserve’s decision on Wednesday to raise its key rate by three quarters of a percentage point, as central banks worldwide grapple with post-COVID labour shortages and the impact of Russia’s invasion of Ukraine on energy prices.

“The Bank of England ... continues to look like something of a laggard compared to international peers, which is likely to keep the pound under selling pressure,” said Luke Bartholomew, senior economist at investment company abrdn. Sterling fell against the US dollar after the decision but stayed above the 37-year low close to $1.12 hit earlier in the day. —Reuters