LONDON (AP) – Britain’s central bank is under pressure to make another big interest rate hike yesterday, with inflation outpacing other major economies but the United States (US) Federal Reserve and other banks acting more aggressively to get prices under control.
The Bank of England hiked its benchmark rate last month by half a percentage point to 1.75 per cent, the biggest increase in 27 years, and it’s expected to at least match that in its latest decision, which was delayed a week during the mourning period for Queen Elizabeth II.
Faced with a slumping currency, tight labour market and inflation near its highest in four decades, officials may feel the need to act more aggressively as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation.
But giving pause could be economic relief measures from new Prime Minister Liz Truss’ government that are expected to ease inflation short term.
The meeting will “tell us not only how worried policymakers are about the slide in sterling and other UK markets, but also how the government’s decision to cap household/business energy prices will translate into monetary policy”, said developed markets economist with ING bank James Smith.
Some economists think a bigger three-quarter-point increase is on the cards. The bank hasn’t made such a big move since 1989.
“But we’d caution against assuming UK policymakers will ramp up the pace of rate hikes simply because that’s what everyone else is doing – or indeed because that’s what markets are pricing,” Smith said.
Surging inflation is a worry for the bank because it eats away at consumers’ purchasing power. The traditional tool to combat inflation is raising interest rates, which reduces demand and therefore prices, by making it more expensive to borrow money.
Inflation in the United Kingdom (UK) is running at 9.9 per cent, close to it’s highest level since 1982 and five times higher than the Bank of England’s two-per-cent target. The British pound is at its weakest against the dollar in 37 years, contributing to imported inflation.
The central bank warned last month that UK inflation would peak at 13.1 per cent by the end of this year and trigger a prolonged recession.
Since then, Truss’ government has unveiled a massive relief programme that caps spiralling energy bills for households and businesses. Economists said the measures mean inflation will peak at a lower level and then fall faster next year.
While UK policymakers have raised rates six consecutive times, they face pressure to match moves by their counterparts in other major economies, which have moved at a faster pace.
In a busy week for central bank action, the US Federal Reserve hiked rates by three-quarters of a point Wednesday for the third consecutive time and forecast that more large increases were ahead. As borrowing costs get more expensive, Fed Chair Jerome Powell acknowledged that there was no painless way to get inflation under control.