September 27, 2022

Interest rates: Bank of England hikes by half a point for second straight month

3 min read

CNN Business

gave Bank of England Announced the seventh hike in interest rates. In less than a year on Thursday, despite forecasts of a recession, as it battles the highest levels of inflation of any G7 economy.

The central bank repeated a half-percentage point hike last month, taking rates to 2.25 percent from 1.75 percent. It said it expected inflation to hit 11 percent next month, lower than previously expected because of government intervention to subsidize energy bills.

“Should the outlook suggest more persistent inflationary pressures, including stronger demand, [monetary policy] The committee will respond vigorously if necessary.

With Thursday’s move, the Bank of England has already pushed the cost of borrowing for businesses and consumers back to levels last seen in 2008 to stem the heat from inflation that has hit 10 Hovering below the percentage.

Like most of its major peers, the central bank has to consider the need to prevent rate hikes from getting out of hand and the damage caused by an aggressive rate hike.

Some economists think so. The UK economy is already in recession., and the Bank of England shares this view. It forecast a 0.1% contraction in UK GDP in the third quarter, partly as a result of the extra public holiday for the Queen’s funeral. In the second quarter, GDP fell so much.

The bank’s policymakers were divided on how aggressive to be this month, with three members arguing in favor of a three-quarter point hike. But they voted unanimously to reduce the bank’s stock of UK government bonds by £80 billion over the next 12 months in another move to tighten monetary policy.

His deliberations are being complicated by the weak pound, which fell to a 37-year low against the US dollar on Wednesday. A weaker currency means Britain has to pay more for imported energy and food, adding to inflationary pressures in the economy.

The U.S. Federal Reserve announced a historic three-quarter percentage point hike in interest rates on Wednesday, adding to the dollar’s selloff. Benchmark US rates are now between 3% and 3.25%.

The European Central Bank also broke new ground earlier this month with its decision to raise euro zone interest rates from 0% to 0.75%. The Swiss National Bank raised rates by three quarters of a percentage point on Thursday, taking them out of negative territory to 0.5 percent.

Further clouding the outlook for the Bank of England is a potentially large increase in UK government spending to reduce skyrocketing energy bills for businesses and households.

UK Finance Minister Kwasi Kwarteng will outline the cost of the subsidy program on Friday, but analysts have already estimated the bill could reach £150 billion ($170 billion) over the next two years.

Combined with tax cuts promised by new Prime Minister Liz Truss, that could keep inflation high for the next few years and increase UK government debt.

In a report published on Wednesday, the independent Institute for Fiscal Studies warned that the government risks putting Britain’s debt “on an unsustainable path”.

“At about 3.5 percent of national income, borrowing will not be more than double the 1.9 percent of national income that averaged over the 60 years before the global financial crisis, when growth prospects were much higher,” it said.

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