Bank of England raises interest rates for the fifth time in a row as inflation rises


LONDON (Reuters) – The Bank of England on Thursday introduced a fifth consecutive rate hike to curb rising inflation.

The Monetary Policy Committee voted 6 to 3 to raise the bank rate by 25 basis points to 1.25%, with the three dissenting members voting for a 50 basis point increase to 1.5%.

The commission said in a statement on Thursday that it will “take the necessary steps to bring inflation back to its target of 2% on a sustainable basis over the medium term”, with the size, pace and timing of any further increases depending on the economic outlook and inflationary pressures. †

“The Committee will be particularly alert to any indications of more continued inflationary pressures and will act strongly if necessary,” the bank added.

The pound fell against the dollar shortly after the announcement, but recovered to gain 0.4%, trading above $1.22 by mid-afternoon.

Policymakers face the unenviable task of bringing consumer prices back under control amid slowing growth and a rapidly depreciating currency, while the UK faces a major cost of living crisis.

At its meeting in May, the Bank raised its key rate by 25 basis points to 1%, the highest level in 13 years, but warned that the UK economy is in danger of slipping into recession.

Since then, new data has shown that inflation in the UK rose to a 40-year high of 9% a year in April, as food and energy prices soared. The Bank now expects inflation to rise to “slightly above 11%” in October, on the back of higher expected energy prices for households following an expected further hike in the UK energy ceiling.

Inflation is rising worldwide due to rising food and energy costs, exacerbated by the war in Ukraine and fears over the supply of agricultural commodities. Supply chain disruptions and shifts in demand due to the pandemic have also pushed up the prices of tradable goods.

However, in its statement on Thursday, the MPC acknowledged that not all undue inflationary pressures can be attributed to global events, noting that domestic factors such as a tight labor market and corporate pricing strategies have also played a role.

Consumer services price inflation, which is more influenced by domestic costs than commodity price inflation, has strengthened in recent months. In addition, core consumer goods price inflation in the United Kingdom is higher than in the euro area and the United States, said the bank.

The economy unexpectedly contracted 0.3% in April after contracting 0.1% in March, the first consecutive declines since April and March 2020, and the OECD has forecast the UK to be the weakest G-7 economy next year. its higher interest rates, tax hikes, reduced trade and rising food and energy prices are hammering households.

The Bank of England’s move deviated from more aggressive action by the US Federal Reserve on Wednesday and the Swiss National Bank earlier on Thursday. The Fed imposed a 75 basis point hike, the largest since 1994, while the SNB hiked 50 basis points, which was more than the market had expected.

A ‘case study’ for central banks

Vivek Paul, UK’s chief investment strategist at BlackRock Investment Institute, noted that the Bank of England was the first of its peers to begin the process of normalizing monetary policy, and is now continuing on its tightening path as it faces with the most acute risks for near-term growth. This means it could serve as a “case study” for how central banks worldwide will respond as recession risk increases.

“We believe that market expectations of future UK rates will ultimately prove to be overstated. The Bank’s own figures say a recession is a real risk – and recent government initiatives to alleviate the cost of living crisis may prove insufficient to to compensate for the weakness of British consumers,” said Paulus.

Ultimately, the Bank has less room for hikes compared to the US: the neutral interest rate – which does not overly stimulate or constrain economic growth – is lower, and the country’s high debt-to-GDP ratio implies greater debt service sensitivity costs for rate increases.”

Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, said that with rising gas prices continuing to put upward pressure on consumer prices this year, the bank could only send a “clear message” to other price drivers in the economy on Thursday that 10% price increases are not an “acceptable new normal”.

“It was supposed to show that it hasn’t softened on inflation, or economically, to anchor inflation expectations,” Ward said.

“In our view, a 50 basis point increase would have better sent that signal. It’s possible that by acting cautiously today, it should pay off more later.”

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