The Bank of England raised interest rates for the fifth time in a row as inflation soared

LONDON – IN Bank of England On Thursday it carried out a fifth consecutive rate hike as it looks to rein in high inflation.

The Monetary Policy Committee voted 6-3 to increase the bank rate by 25 basis points to 1.25%, with the three opposition members voting to increase the bank rate by 50 basis points to 1.5%.

The committee said in a statement on Thursday that it will take the necessary measures to return inflation to the 2% target sustainably over the medium term, with the scope, speed and timing of any further hikes depending on economic expectations and inflationary pressures. .

“The committee will be particularly alert to indications of further persistent inflationary pressures, and will act aggressively if necessary in response,” the bank added.

The fairy It fell against the dollar shortly after the announcement, but made up for most of its losses to trade above the $1.21 level.

Policymakers face the unenviable task of restoring control of consumer prices on the back of slowing growth and a rapid devaluation of the currency, while the UK faces a major cost-of-living crisis.

at the May meeting The bank raised the policy rate by 25 basis points to 1%.It is the highest level in 13 years, but warned that the British economy risks falling into a recession.

Since then, recent data has shown that UK inflation rose to a 40-year high at 9% Annually in April with higher food and energy prices. The Bank now expects inflation to rise to “slightly above 11%” in October, reflecting higher expected energy prices for households following the expected additional increase in the UK’s energy price ceiling.

Inflation is rising worldwide due to rising food and energy costs, which have been exacerbated by the war in Ukraine and concerns about the supply of agricultural commodities. Supply chain disruptions and shifts in demand as a result of the pandemic have also pushed up prices for tradable goods.

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

“Consumer inflation, which is influenced more by domestic costs than commodity inflation, has strengthened in recent months. In addition, inflation for core consumer goods is higher in the UK than in the euro area and the US,” the bank said.

The The economy unexpectedly shrank 0.3% in April After contracting 0.1% in March, the first consecutive decline since April and March 2020, the Organization for Economic Co-operation and Development forecast the UK will be the weakest economy in the Group of Seven next year with higher interest rates, higher taxes and lower trade. Soaring food and energy prices are affecting families.

The Bank of England’s move deviated from the more aggressive measures it had taken US Federal Reserve Wednesday and Swiss National Bank earlier on Thursday. The Fed imposed a rise of 75 basis points, its largest rise since 1994, while the Swiss National Bank rose by 50 basis points, which was more than the market had expected.

A “case study” of central banks

Vivek Paul, chief UK investment strategist at BlackRock Investment Institute, noted that the Bank of England was the oldest of its peers to begin the process of monetary policy normalization, and is now along a tightening path while facing the sharpest risks of near-term growth. That is, it could serve as a “case study” of how central banks around the world are reacting to rising recession risks.

“We believe market expectations of future rates in the UK will eventually prove to be overblown. According to the bank’s figures, recession is a real risk – and recent government initiatives to alleviate the cost of living crisis may not be enough to offset the weakness of the British consumer,” said Paul.

“Ultimately, the bank has less room for upsides than the United States: a neutral interest rate — which neither stimulates nor excessively restricts economic growth — is lower, and the country’s higher debt-to-GDP ratio means greater sensitivity to debt service costs and a higher rate.”

With high gas prices continuing to put upward pressure on consumer prices this year, all the bank can do on Thursday is “send a clear message” to other rate-setters in the economy that a 10% price increase is not an “acceptable new normal”.

“It had to show that it was not backing down on inflation, or in economic talk to solidify inflation expectations,” Ward said.

“In our view, a 50 basis point increase would have been most appropriate to send that signal. It is possible that by acting cautiously today, you may have to provide more in the future.”