The Bank of England has chosen to raise its key interest rate by 0.5 percent to 2.25%, a 14-year high, as UK inflation continues to run ahead of its target despite the economic slowdown.
The bank also confirmed that it will begin active sales of UK government bonds in October, reducing the portfolio it has amassed over the years.
The bank said that the short-term outlook for inflation had improved as a result of new government plans to cap energy prices for households and businesses. At the same time, the BoE warned that it remains wary of continued pressure from sterling's fall and the still-strong labor market.
The BoE now expects inflation to peak at just below 11% in October, lower than its previous forecast, but warns it will take several months to fall back below 10%.
The GBP currency strengthened slightly against the US dollar to trade at 1.1321. The US dollar index strengthened by 0.12% to trade at 110,480.
The BoE's decision to raise just 50 basis points, coupled with the Federal Reserve's 75 basis point hike on Wednesday, means the premium on dollar interest rates has widened again, making the dollar more attractive.
Analysts say the difference in stance is justified, given the U.K.'s economic outlook. the weaker. Samuel Toombs, an analyst, Pantheon Macroeconomics thinks the outlook for UK CPI inflation has improved and the economic downturn is not showing too much evidence.
