(Bloomberg). — For the third consecutive meeting, the Bank of England increased its key interest rates. This brought borrowing costs back at their pre-pandemic levels and warned that the conflict in Ukraine could push inflation higher than 8%.

The increase to , was backed by eight of the bank’s nine policy makers, with Deputy Governor Jon Cunliffe voting for no change. The increase to reflects the fastest pace at which tightening has been occurring since 1997, when the BOE gained the independence authority to decide policy. 

Inflation is now expected to increase to around 8.8%, up from 7.25 percent previously. It warned the peak rate later this year could be “several percentage points higher” than estimated in February. 

Officials led by Governor Andrew Bailey said a further tightening of policy “might be” appropriate in the coming months, a softening from the wording in February, when they said such a move was “likely.” They also noted “there were risks on both sides of that judgment.”

The spike in inflation means the squeeze on households incomes in the U.K. will be “materially larger” than implied in February, the BOE said. It also warned that the war in Ukraine will exacerbate global supply chain disruptions and said its regional agents found evidence it’s already snarling supply chains for manufacturers. 

Officials stated that the squeeze on incomes would lead to lower growth prospects and increase unemployment. Cunliffe in voting to leave rates unchanged focused on that dynamic and concerns about the “very material negative impacts” that higher commodity prices will have on living standards.

The committee agreed that strong growth over the past months, as well as continued tightening of the labor market, warranted the move. The committee stated that the job market was not likely to improve as fast as it had been anticipated in February.

This decision indicates that policymakers will need to balance both inflation prevention and growing risks of growth due to the conflict in Ukraine.

Further out, the BOE also said inflation will “fall back materially,” a comment that, combined with the gloomy outlook for living standards, suggests a degree of pushback against current market pricing for rates to hit 2% by the end of the year.

The BOE leads the global tightening of the monetary policy and was the first institution to return rates to pre-covid levels. Just hours before the U.S. Federal Reserve increased interest rates by 25%, the BOE made its decision and indicated six additional hikes for this year.

©2022 Bloomberg L.P.