LONDON – The Bank of England on Thursday implemented a fifth interest rate hike in a row as it appears to be limiting sky-high inflation.
The Monetary Policy Committee voted 6-3 to raise the bank interest rate by 25 basis points to 1.25%, with the three dissenting members voting in favor of an increase of 50 basis points to 1.5%.
The committee said in a statement on Thursday that it would “take the necessary measures to bring inflation back to the 2% target sustainably in the medium term,” with the extent, pace and timing of any further increases depending on the economic outlook and inflationary pressures. .
“The Committee will pay particular attention to indications of more persistent inflationary pressures, and will, if necessary, act forcefully in response,”[ads1]; the bank added.
The pound fell against the dollar shortly after the announcement, but took back most of the losses to trade above the $ 1.21 handle.
Politicians are facing the unenviable task of bringing consumer prices back under control against a backdrop of declining growth and a rapidly declining currency, while the UK is facing a major cost-of-living crisis.
At its meeting in May, the bank raised the base rate by 25 basis points to 1%, the highest level in 13 years, but warned that the British economy was in danger of falling into recession.
Since then, recent data have shown that inflation in the UK rose to a 40-year high of 9% annually in April as food and energy prices rose. The bank now expects inflation to rise to “just over 11%” in October, reflecting higher projected energy prices for households following an expected further increase to the UK energy price target.
Inflation is rising worldwide due to high food and energy costs, which have been exacerbated by the war in Ukraine and are fueling fears of agricultural goods. Disruptions in the supply chain and changes in demand as a result of the pandemic have also driven up the prices of tradable goods.
But in its statement on Thursday, the MPC acknowledged that not all the excess inflationary pressures can be calculated up to global events, noting that domestic factors such as a tight labor market and corporate pricing strategies have also played a role.
“Consumer price inflation, which is more affected by domestic costs than commodity prices, has strengthened in recent months. In addition, core consumer price inflation is higher in the United Kingdom than in the euro area and the United States.” in the bank.
The economy shrank unexpectedly by 0.3% in April after a decline of 0.1% in March, the first back-to-back declines since April and March 2020, and the OECD has predicted that the UK will be the weakest G-7- economy next year. higher interest rates, tax increases, reduced trade and rising food and energy prices are hitting households.
The Bank of England’s move deviated from the more aggressive actions of the US Federal Reserve on Wednesday and the Swiss National Bank earlier on Thursday. The Fed imposed an increase of 75 basis points, the largest since 1994, while the SNB increased by 50 basis points, which was more than the market expected.
A ‘case study’ for central banks
Vivek Paul, British investment strategist at the BlackRock Investment Institute, noted that the Bank of England was the earliest of its peers to start the process of monetary policy normalization, and is now on the tightening path while facing the most acute risks to near-term growth. This means that it can serve as a “case study” for how central banks around the world will react when the recession risk increases.
“We believe the market’s expectations of future UK interest rates will eventually prove to be exaggerated. According to the bank’s own figures, the recession is a real risk – and recent government initiatives to alleviate the cost of living crisis may prove insufficient to offset weakness in UK consumers. “, said Paul.
“Ultimately, the bank has a lower ceiling for increases compared to the US: the neutral interest rate – the one that neither stimulates nor limits economic growth in excess – is lower, and the country’s high debt to GDP ratio implies greater sensitivity to debt service costs to assess increases. “
Karen Ward, marketing strategist for EMEA at JPMorgan Asset Management, said that with rising gas prices continuing to put upward pressure on consumer prices this year, all the bank could do on Thursday was “send a clear message” to other economists that 10% price increases is not «an acceptable new normal».
“It had to show that it has not been soft on inflation, or financially to anchor inflation expectations,” Ward said.
“In our view, an increase of 50 basis points would have sent that signal more appropriately. It is possible that by acting cautiously today, it may have to deliver more further down the line.”