Bank of England raises interest rates to 13-year high as inflation soars

The Bank of England raised interest rates for a fifth consecutive meeting, putting them at a 13-year high, and sent its strongest signal yet that it is ready to trigger bigger moves if needed to control inflation. The nine-member Monetary Policy Committee voted 6-3 to raise the benchmark lending rate by 25 basis points to 1.25%. A minority of officials maintained their push for a move double that size.

Policymakers led by Governor Andrew Bailey hinted they could join a growing global trend of bigger hikes if inflation continues to soar, saying that “he would be particularly alert to indications of higher inflationary pressures. persistent and would act forcefully in response if necessary”.

Basically, that language was endorsed by all BOE voters, a departure from May when two declined to endorse advice that more hikes were needed.

The bank also raised its forecast for peak inflation this year to “slightly above” 11%, reflecting the expected increase in the energy price cap in October, and said it now expects the economy to contract in the current quarter.

Investors have increased their bets for further rate hikes this year, pegging a base rate of 3% by the end of the year. That would likely require three half-point and one quarter-point rate increases in the four remaining meetings this year, an unprecedented pace of tightening. Rates were just 0.1% as recently as December.

For now, the BOE, which was the first major central bank to raise rates after the pandemic, is moving more slowly than some of its peers. But as the BOE grapples with an inflation rate that has already hit a four-decade high of 9%, officials are also worried about an economic slowdown that puts the UK at risk of recession.

Rates rise globally amid war and inflation

Nearly four dozen countries have raised interest rates in the past six months as central banks in the United States, England, India and other countries raise borrowing costs in the goal of containing the fastest inflation in decades.

The Federal Reserve raised its benchmark policy rate on Wednesday – its third increase this year and the largest since 1994. Brazil and Saudi Arabia were among other countries to announce rate policy changes hours after the decision from the Fed.

On Thursday, the Swiss National Bank raised its key rate for the first time in 15 years in a surprise move, with the Bank of England also raising the key rate. So far in 2022, 44 countries have raised rates, according to FactSet data, with more moves to come.

Higher rates are powerful tools to fight rising prices: they make borrowing more expensive, which weighs on consumer demand and business expansion, which in turn dampens economic growth and slows hiring. This can translate into lower wage growth for households and less pricing power for businesses, which will eventually lower inflation. This is a delicate balancing act, putting pressure on policymakers to rein in the economy without depressing growth. Economists and investors see it as an increasingly formidable challenge.

The Fed, led by Chairman Jerome Powell, is poised to continue raising rates this year, most likely at a rapid pace. The European Central Bank announced that it would raise rates in July for the first time in 11 years.

The world’s upward march is a big departure from the policy approach that followed the financial crisis, when central bankers often rose in spurts, if at all.

Before the coronavirus, economists thought the world could be stuck in a low-rate, low-inflation, slow-growth trap – and many global economies began to cut rates.

But after the pandemic began, government stimulus spending plans intended to cushion the economic fallout ended up fueling demand. Supply chains have been disrupted by factory closures, shipping issues and labor shortages. Combined, these forces have reignited long dormant price pressures (NYT).

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