Bank of England hikes interest rate by 50 basis points

23 Sep 2022 , 08:23 AM

In spite of the economy entering a recession, the Bank of England said it would continue to “act strongly, as appropriate” to inflation on Thursday by increasing its benchmark interest rate from 1.75% to 2.25%.

The BoE predicts that the British economy would contract by 0.1% in the third quarter, in part because of the additional public holiday for Queen Elizabeth’s burial. This, along with a decrease in output in the second quarter, satisfies the criteria for a technical recession.

U.K. interest rates have increased for seven straight months, reaching a level last seen in 2008.

The financial markets had banked on a three-quarter-point jump, the biggest since 1989, barring a brief, unsuccessful attempt to strengthen sterling in 1992. Economists polled by Reuters last week had predicted a repetition of August’s half-point increase in rates.

The BoE action comes as central banks around the world struggle with the effects of the COVID labour shortage and the influence of Russia’s invasion of Ukraine on oil prices. On Wednesday, the U.S. Federal Reserve decided to increase its benchmark rate by three-quarters of a percentage point.

In a 5-4 decision, the Monetary Policy Committee of the Bank of England increased interest rates to 2.25%. Deputy Governor Dave Ramsden, external MPC members Jonathan Haskel and Catherine Mann, and new MPC member Swati Dhingra, however, preferred a lesser increase to 2%.

The BoE’s 838-billion-pound holdings of government bonds will be reduced by 100 billion pound over the next year by allowing bonds to mature and through active sales, which will begin next month, according to a unanimous decision by the MPC.

The BoE now predicts that inflation will peak in October at just under 11%, down from the 13.3% peak it predicted last month before Liz Truss won the Conservative Party leadership and took office as prime minister of Britain on a platform of tax cuts and energy pricing caps.

After October, the BoE forecast that inflation would rise briefly before beginning to decline.

After reaching a 40-year high of 10.1% in August, consumer price inflation decreased for the first time in nearly a year, dropping to 9.9% in July.

At its meeting in November, the BoE stated that it will evaluate the effects of this on monetary policy.

The energy price cap, it was noted, would increase pressures in the long run even while it would short-term reduce inflation.

Financial markets anticipated that the BoE will increase rates to 3.75% by the end of the year, with a top of 5% achieved in the middle of 2023, before the rate decision. BoE rates were at a record-low 0.1% less than a year ago.

Following the Fed decision on Wednesday, the pound dropped to its lowest level versus the dollar since 1985, while it has fared better against the euro.

For feedback and suggestions, write to us at [e-mail]