The Bank of England raised its key interest rate for the third time in as many policy meetings Thursday, a fresh sign that central banks in many parts of the world are giving priority to countering a surge in inflation rather than slowing growth as their economies brace for the negative impact of Russia’s war on Ukraine.

       The BOE’s decision came a day after the Federal Reserve announced its first rate rise since 2018, penciling in six more increases by year’s end, and was made for similar reasons.

       U.K. inflation hit a 30-year high in January and is expected to increase further as Russia’s invasion keeps energy prices high. One similarity is the tight jobs market, with the unemployment rate falling to a two-year low of 3.9% in the three months through January. The BOE said that the rise in commodity prices since Russia’s invasion of its neighbor means the rate of inflation is set to be around 8% in the three months through June, and perhaps even higher later in the year.

       The U.K.’s central bank lifted its key rate to 0.75% from 0.5%, and said further increases might be needed over the coming months, although it added that “there are risks on both sides of that judgment."

       “Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow," the BOE said.

       The British pound weakened 0.4% against the dollar and U.K. government bonds rallied with shorter-dated yields declining the most, an indication that investors expect the BOE to raise its key rate less rapidly than they did ahead of the decision.

       “This is the opposite of what you would expect from a rate hike," said James Athey, an investment manager at Abrdn. “The decision itself was expected by consensus but the language has softened around the need for future tightening."

       The BOE’s sequence of three rate increases in three policy meetings is its most aggressive since it was granted independence to set interest rates in mid-1997, when it embarked on four rate rises in successive meetings. However, the rise in borrowing costs will add further pressure on household budgets that are set to come under strain from a sharp rise in energy prices next month, and the prospect of higher taxes.

       Last month, the BOE forecast that average incomes in Britain after accounting for wage growth, inflation, tax increases and benefit changes will fall by 2% this year—the steepest decline since comparable records began in 1990. The pinch is expected to hold back the broader economy just when it needs all engines firing to propel itself clear of the slump caused by the Covid-19 pandemic and fresh headwinds from Russia’s war.

       In its statement Thursday, the BOE acknowledged that household incomes would be squeezed even more by higher energy prices, but said it must focus on containing inflation.

       “This is something monetary policy is unable to prevent," the BOE said. “The role of monetary policy is to ensure that, as this real economic adjustment occurs, it does so consistent with achieving the 2% inflation target."

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       However, the impact of higher energy prices on household spending power persuaded policy maker Jon Cunliffe to vote against the rate rise, preferring to leave borrowing costs at 0.5%.

       Some other central banks in Europe are also raising their key interest rates. The European Central Bank last week said it may end its longstanding bond-buying program in the three months through September, opening the way for a first rise in its key rate since 2011.

       However, few are tightening monetary policy at the same time that their government is hiking taxes. The U.K. government has already announced increases in its tax rate on company profits, as well as a ￡13 billion increase in income taxes, equivalent to $17 billion, intended to help fund elderly care.

       It has also suspended the usual practice of raising its income thresholds for the various rates of income tax in line with inflation. The Institute for Fiscal Studies, a nonpartisan research body, Tuesday estimated that the pickup in inflation since that was announced means the government will likely reap ￡20.5 billion from the freeze, more than twice the ￡8 billion initially foreseen.

       U.K. exports to Russia and Ukraine aren’t significant but the economy is expected to slow as rising energy prices reduce household spending on other goods and services, while business confidence weakens in response to the war and the uncertainty it has brought about Europe’s future.

       Over recent decades, the BOE has responded to similar threats to growth by cutting its key interest rate and increasing its bond purchases. That was its response to both the U.K.’s vote to leave the European Union in 2016 and the onset of the Covid-19 pandemic in 2020.

       However, its decision to raise rates Thursday indicates that this time around, policy makers are more worried about inflation getting out of control than they are about weakening economic growth.

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