22.9 C
Brunei
Friday, December 9, 2022
22.9 C
Brunei
Friday, December 9, 2022
More
    - Advertisement -

    BoE makes biggest interest rate hike in 30 years

    LONDON (AP) – The Bank of England (BoE) rolled out its biggest interest rate increase in three decades on Thursday, saying the move was needed to beat back stubbornly high inflation that is eroding living standards and is likely to trigger a “prolonged” recession.

    The central bank boosted its key rate by three-quarters of a percentage point, to three per cent, as the invasion of Ukraine has driven up food and energy costs, pushing consumer price inflation to 40-year highs.

    The aggressive step was expected after a more cautious half-point increase six weeks ago and matches the recent moves by the United States (US) Federal Reserve and the European Central Bank.

    While higher interest rates will boost the cost of mortgages and credit card debt for already-stretched consumers, the move was necessary to control inflation that has left people with less money to spend and is slowing economic activity, Bank of England Governor Andrew Bailey said.

    “If we do not act forcefully now, it will be worse later on,” Bailey told reporters, hinting he’d be prepared for more increases ahead.

    A woman walks past an estate agent in London. PHOTO: AP

    The bank, whose task got tougher after former prime minister Liz Truss’ economic plans roiled financial markets, forecast that the British economy is likely to contract for two years through June 2024. That would be the longest recession since at least 1955, according to the Office for National Statistics.

    The rate increase is the BoE’s eighth in a row and the biggest since a short-lived 1992 hike. It comes a day after the US Federal Reserve announced a fourth consecutive three-quarter point jump.

    Central banks worldwide have struggled to contain inflation after initially believing price increases were fuelled by international factors beyond their control.

    Their response has intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.

    Thursday’s rate decision was the first since Truss’ government announced GBP45 billion (USD52 billion) of unfunded tax cuts, which sent the pound plunging to record lows against the US dollar, pushed up mortgage costs and forced Truss from office after just six weeks.

    While most of Truss’ programme has been cancelled, the fallout remains: Borrowing costs are higher for the government, companies and homeowners because of concerns about economic and political stability in Britain, the bank said.

    Truss’ successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills. Sunak and Treasury Chief Jeremy Hunt plan to reveal their economic plan on November 17.

    “The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible,” Hunt said.

    The BoE expects inflation to peak at around 11 per cent in the last three months of the year, up from 10.1 per cent in September. Inflation should begin to slow next year, dropping below the two per cent target within two years, the bank said.

    The squeeze on people’s incomes likely contributed to a 0.5-per- cent decline in gross domestic product in the three months through September, which may be followed by a 0.3-per-cent drop in the fourth quarter, according to the bank’s forecast.

    The projections are based on financial market data suggesting the key interest rate will rise to 5.25 per cent by the third quarter of next year. The bank’s survey of financial professionals forecasts a lower peak of 4.5 per cent, which would shorten the recession.

    Bailey said there is uncertainty about how far and how fast the bank will boost interest rates because of volatility in natural gas prices and the country’s tight labour market.

    - Advertisement -
    - Advertisement -
    spot_img

    Latest article

    - Advertisement -
    spot_img