Bank of England raises interest rates amid inflation crisis
LONDON (AP) — The Bank of England raised interest rates by half a percentage point on Thursday as it sought to rein in double-digit inflation that is fueling a cost-of-living crisis, strikes of the public sector and fears of recession.
The bank’s monetary policy committee voted 7-2 to raise its benchmark rate to 4%, approving the 10th consecutive rate hike since a post-pandemic surge in the global economy and Russia’s war in Ukraine pushed inflation to 40-year highs.
Economists suggest this could be the last major rate hike from Britain’s central bank after inflation slowed to 10.5% in December from a peak of 11.1% two months earlier. He predicted a drop to around 4 percent by the end of the year.
“We have already done a lot on tariffs. The full effect of this has yet to materialize, but it is too early to declare victory just yet,” bank governor Andrew Bailey told a news conference. He added: “We have seen a turn, but it is very early and the risks are very high.”
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The bank pointed to high global inflation, but said “it is likely to have peaked in many advanced economies, including the UK”, noting lower energy prices and less disruption to the supply chain.
The US Federal Reserve began to scale back its response, raising its key rate by just a quarter point on Wednesday. The European Central Bank, meanwhile, is set to get big again on Thursday, with economists forecasting a half-point increase.
The Bank of England, which noted that more hikes “would be needed” if inflation proves more persistent, said its forecast for a recession was less severe than expected. The overall size of the economy will shrink through 2023 and the first quarter of 2024 as high energy prices and high interest rates dampen spending, the bank said.
“This forecast meets the technical definition of a recession, which is at least two consecutive quarters of declining output,” the bank said. “But this is a much shallower production decline profile than” expected in November.
Optimism grew that rate hikes could start to peter out after UK inflation fell for a second consecutive month to 10.5% in December from a high of 11.1% in October . That’s still much higher than in the United States and the 20-nation eurozone, where inflation slowed to 6.5% in December and 8.5% in January, respectively.
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As the cost of food and services rises and wage increases beat forecasts, the bank has sent the message that it is serious about fighting inflation even as energy prices fall and worries about slow economic growth take center stage.
“The extent to which domestic inflationary pressures ease will depend on developments in the economy, including the impact of the large increases in the Bank Rate so far,” the bank said in a statement. “There are considerable uncertainties around the outlook.”
After more than a decade of historically low interest rates, the Bank of England began raising borrowing costs in December 2021, when its key rate was just 0.1%. The bank stepped up its fight against inflation last year, approving four big hikes of half a point or more since August to take the rate to 3.5%.
Inflation soared after Russia invaded Ukraine, leading to a sharp rise in food and energy prices, leading to the biggest drop in UK living standards in years 1950. It sparked a wave of strikes – including the biggest day of industrial action in more than a decade on Wednesday – as nurses, train drivers, border guards and teachers demand pay rises.
The government is trying to prevent rising wages from triggering a second wave of home-grown inflation that could be harder to control.
Rising prices are also stifling economic growth and straining public finances as the government spends billions to help consumers and businesses hit by high energy costs this winter. However, wholesale natural gas prices in Britain are down 75% from their peak at the end of August, which will mean lower costs for businesses and consumers in the months ahead.
The International Monetary Fund said this week that the UK was on track to be the only major economy to contract this year, even as the outlook for the rest of the world improves. The IMF said the country’s gross domestic product is expected to contract by 0.6% in 2023, against a previous growth forecast of 0.3%.
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