The Bank of England on Thursday lifted its main interest rate for the second time in a row to tackle decades-high inflation that is hurting economic recovery.

The BoE said Britain’s annual inflation rate would peak at 7.25 percent in April, compared with 5.4 percent last December which was already a near 30-year high.

It also slashed its forecast for 2022 UK economic growth to 3.75 percent from an estimate of 5.0 percent before the Omicron coronavirus variant struck.

With soaring energy prices in particular hurting the recovery, the BoE said following a regular policy meeting that it had decided to raise borrowing costs again by a quarter point to 0.5 percent, the level before the pandemic.

Policymakers were divided however on the size of the latest increase.

A majority of five members, including governor Andrew Bailey, voted for a rise to 0.5 percent, while the remaining four wanted a larger increase to 0.75 percent.

“The Bank has become more hawkish, but it doesn’t appear to be signalling it intends to raise interest rates very rapidly,” concluded Paul Dales, chief UK economist at Capital Economics, which is pricing in three more hikes this year to 1.25 percent.

The pound soared on news that the BoE narrowly avoided a larger 50-basis-point hike, reaching the highest level against the euro for almost two years.

The BoE, whose chief task is to keep UK annual inflation close to 2.0 percent, had already increased its main rate in December.

Policymakers lifted borrowing costs from a record-low 0.1 percent to 0.25 percent — their first tightening in more than three years.

The move came after the central bank slashed its interest rate dramatically in 2020 to help the economy weather the effects of Covid.

– Rising costs –

Minutes of the latest meeting said all nine policymakers judged that a further increase was warranted given labour market and cost pressures.

Justifying its rate hikes, Bailey later told a press conference: “The only thing we can say is: if we don’t act it will be worse” for households.

The UK government on Thursday stepped in to help the hardest-hit households struggling with soaring energy bills, announcing an aid package worth £9 billion ($12.2 billion, 10.8 billion euros).

It came as the BoE increased its policy rate at back-to-back meetings for the first time since June 2004.

The European Central Bank on Thursday stuck to its ultra-loose monetary policy despite record inflation in the eurozone putting the Frankfurt-based institution under mounting pressure to raise rates.

The US Federal Reserve is expected to hike borrowing costs as many as seven times before 2023, with an initial 50-basis-point move pencilled in for March.

At the same time, Britain’s economy has surpassed its pre-pandemic level after recording strong growth in November.

Since then, however, retail sales suffered a record drop in December as consumers shunned bricks-and-mortar shops owing to concerns over the Omicron coronavirus variant.

While higher interest rates increase costs for borrowers, including homeowners and businesses, they improve returns on savings.

As the pandemic erupted in early 2020, the BoE slashed its key interest rate from 0.75 percent and also began pumping massive sums of new cash into the economy.

It has created £450 billion under its quantitative easing (QE) programme since March 2020, when Britain imposed its first coronavirus lockdown.

Prior to that, it had pumped hundreds of billions of pounds worth of QE into the UK economy over a decade following the 2008-2009 global financial crisis and Brexit.

The central bank’s total emergency stimulus package stands at £895 billion.

BoE policymakers voted unanimously Thursday to start reducing UK government bond purchases by stopping the reinvestment of gilts, in line with prior guidance, and sell down corporate bond holdings.

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