Bank of England unveils another half-point rate hike but avoids more aggressive step

The Bank of England hiked its interest rate again by another half-percentage point on Thursday to combat soaring inflation as it warned that the UK’s economy had already entered into recession. However, it avoided more aggressive steps to quell inflation that the US Federal Reserve and other banks have taken.

The BoE raised its key interest rate to 2.25% from 1.75% and said it would continue to «respond forcefully, as necessary» to inflation, despite the economy slipped into recession.

It is the Bank of England’s seventh straight move to increase borrowing costs as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation.

The British central bank met most market expectations as it lifted its key rate by 0.5 percentage points, repeating its August increase that had been the biggest rise since 1995.

The BoE estimates Britain’s economy will shrink 0.1% in the third quarter – partly due to the extra public holiday for Queen’s funeral – which, combined with a fall in output in the second quarter, meets the definition of a technical recession.

BoE’s decision had been postponed from last week following the death of Queen Elizabeth II.

Economists forecast a repeat of Aug’s half-point increase in rates

Economists last week had forecast a repeat of August’s half-point increase in rates, but financial markets had bet on a three-quarter-point rise, the biggest since 1989, barring a brief, failed attempt in 1992 to support sterling.

«Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary,» the BoE said, using a similar form of words to previous months for its policy intentions.

The BoE’s Monetary Policy Committee voted 5-4 to raise rates to 2.25%, with Deputy Governor Dave Ramsden and external MPC members Jonathan Haskel and Catherine Mann voting for an increase to 2.5%, while new MPC member Swati Dhingra wanted a smaller rise to 2%.

The MPC also voted unanimously to reduce the BoE’s 838 billion pounds of government bond holdings by 100 billion pounds over the coming year, by allowing bonds to mature and through active sales, which will start next month. This is in line with the goal it stated in August.

The BoE now expects inflation to peak at just under 11% in October, below the 13.3% peak it forecast last month, before Liz Truss won the Conservative Party leadership and became Britain’s prime minister with a promise to cap energy tariffs and cut taxes.

Inflation would remain above 10% for a few months after October, before falling, the BoE added.

Other key updates

The Fed on Wednesday unveiled a 0.75-percentage-point increase, its third straight jumbo hike, one day after Sweden’s Riksbank shocked markets with a jump of a full percentage point.

On Thursday, the Swiss National Bank unleashed a 0.75-percentage-point hike that lifted its policy rate out of negative territory for the first time since 2015, meaning depositors no longer have to pay to park their money at the bank.

On Thursday, the Norwegian central bank raised its rate by 0.5 percentage points, taking it to its highest level in more than a decade.

Bucking the trend, the Bank of Japan kept its ultra-loose monetary policy unchanged, sending the yen to a fresh 24-year low against the dollar.

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