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The Bank of England raises interest rates to combat rising inflation




BOE Governor Andrew Bailey has warned the bank is on a “narrow path” between growth and inflation.

Bloomberg | Bloomberg | Getty pictures

LONDON – The Bank of England on Thursday raised interest rates to the highest level in 13 years in an attempt to cope with rising inflation.

In a generally expected move, BOE decision-makers voted for a fourth consecutive rate hike since December at a time when millions of British households are struggling with sky-high living costs.

The bank̵[ads1]7;s monetary policy committee approved an increase of 25 basis points with a majority of 6-3, and raises the base rate to 1%. The bank said that members of the minority preferred to increase the interest rate by 0.5 percentage points to 1.25%.

Like many central banks around the world, the BOE is tasked with managing the economy through a rise in inflation that has been exacerbated by Russia’s unprovoked attacks on Ukraine.

Annual inflation in the UK reached a 30-year high of 7% in March – more than three times the BOE’s target level – as food and energy prices continue to rise. The UK’s consumer confidence, meanwhile, plunged to an almost record low in April due to fears of slowing economic growth.

The bank expects inflation in the UK to rise to around 10% this year as a result of the war between Russia and Ukraine and shutdowns in China. It has also warned that prices are likely to rise faster than the income of many people, which exacerbates the cost-of-living crisis.

“Global inflationary pressures have intensified since Russia’s invasion of Ukraine,” the bank’s MPC said. “This has led to a significant deterioration in the outlook for growth in the world and the UK.”

BOE Governor Andrew Bailey had previously warned that the bank was on a “narrow path” between growth and inflation – and suggested that the bank might take a more incremental approach to austerity instead of following the US Federal Reserve with an increase of 50 basis points. .

On Wednesday, the US Federal Reserve raised its reference rate to a target of between 0.75% and 1%. It marked the Fed’s largest interest rate hike in two decades and its most aggressive move to date in the fight against 40-year high inflation.

Sterling traded down 1.2% to $ 1.2468 shortly after BOE’s interest rate decision. The British currency erased the rise from the previous session, and fell back to its lowest level since July last year.

“UK GDP growth is expected to slow sharply during the first half of the forecast period,” the bank said. “It mainly reflects the significant negative effect of the sharp increases in global energy and tradable prices on the real incomes of most British households and the profit margins of many British companies.”

The UK’s gross domestic product is estimated to have risen by 0.9% in the first quarter of the year, the bank said, noting that this was stronger than expected in the February report.

Unemployment, meanwhile, fell to 3.8% in the three-month period to February and is expected to fall further in the coming months.

“The combination of lower growth and higher inflation is a challenge for many decision makers, and is reflected in today’s divided vote,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.

“But with inflation set to remain higher longer in 2022, the tightening of MPC policy in autopilot mode remains in the midst of concerns over other round effects from tight labor markets,” Mehdi said.

“Looking ahead, energy prices and shutdowns in China are important risk factors, but the possibility of cooling inflation later this year and the impact of significant household income pressure on growth may ultimately put the bank on a more pigeon-like path,” they added.



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