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Bank of England Is Set to Raise Rates After U.K. Political Turmoil
Bank of England Raises Rates Most Since 1989
(about 4 hours later)
In their first meeting since the short and turbulent premiership of Liz Truss came to an abrupt end two weeks ago, the Bank of England’s rate-setting policymakers are expected to raise interest rates on Thursday by the largest amount since 1989.
In their first meeting since the short and turbulent premiership of Liz Truss came to an abrupt end two weeks ago, the Bank of England’s policymakers raised interest rates on Thursday by the largest amount since 1989.
Traders are betting that the central bank will lift interest rates three-quarters of a percentage point, ramping up its effort to tighten financial conditions and taking the bank’s key policy rate to 3 percent, the highest since November 2008. Some analysts, though, say the bank may surprise with a more modest half-point increase, which would match its two previous moves.
The central bank lifted its key policy rate by three-quarters of a point, ramping up its effort to tighten financial conditions and taking the rate to 3 percent, the highest since November 2008. The bank intensified its battle against inflation even as it predicted that the British economy would enter a recession for a “prolonged period.”
Through all the tumult in Britain the past few months, high inflation, as well as the threat of it lingering for longer than expected, has remained a consistent scourge for the central bank. The annual inflation rate topped 10 percent in September, the highest in four decades and five times the central bank’s target.
Through all the tumult in Britain the past few months, high inflation, as well as the threat of it lingering for longer than expected, has remained a consistent scourge for the central bank. The annual inflation rate topped 10 percent in September, the highest in four decades and five times the central bank’s target.
Policymakers have said they are determined to bring inflation down to its 2 percent target and will use higher interest rates to do so. But that job is complicated because Britain’s economic outlook has worsened as rising energy bills, food costs and mortgage rates have squeezed consumers. This is likely to temper how high the central bank chooses to raise interest rates. In part, that’s because it takes time for rate changes to have an impact, and so there is a risk that Britain will experience tight financial conditions while in a recession, when households and businesses are least able to bear the additional economic pain.
Bank officials have said they are determined to bring inflation down to its 2 percent target and will use higher interest rates to do so. But they also sent a clear message to financial markets that the bank was unlikely to raise interest rates as high as traders had expected, which was about 5.2 percent when the bank set its forecasts in late October.
The Bank of England “seems to be acutely aware of the dangers of over-tightening, and we think it may tolerate higher inflation as the lesser of two evils as we enter a recession,” analysts at HSBC wrote in a note to clients. “With that, the probability that hikes end in 2022 is increasing once again.”
The Bank of England expects inflation to climb to about 11 percent this year, which is less than it had previously forecast because of a government plan to freeze household energy bills. While the freeze is holding down the headline inflation rate, it could add to price pressures coming from other goods and services, as households have to spend less on their energy bills, the bank said.
It’s a challenge for many central banks, which are also raising interest rates quickly in the face of the highest inflation in decades and potential recessions. On Wednesday, the Federal Reserve raised rates by three-quarters of a percent and signaled that more increases were to come, though the pace of them will slow. Last week, the European Central Bank raised rates by three-quarters of a point as it said inflation could increase but heavily stressed that the economy was weakening. Around the world, many central banks are taking action to protect against rising prices and falling currencies.
Early next year inflation is expected to be around 10 percent, the bank said, and later drop sharply as the global forces driving up inflation, such as energy costs and supply chain bottlenecks, diminish.
When policymakers at the Bank of England last met six weeks ago, on Sept. 22, the central bank raised interest rates by half a point. There was a rare three-way voting split as policymakers debated how entrenched inflation was becoming. The next day, Ms. Truss’s finance minister, Kwasi Kwarteng, announced a series of unfunded tax cuts that provoked turmoil in the government bond market and set Britain’s fiscal policy on a collision course with monetary policy.
The bank’s latest projections “described a very challenging outlook for the U.K. economy,” policymakers said, according to the minutes of their meeting this week. “It was expected to be in recession for a prolonged period.”
At the time, the central bank said it would need to have a “significant” response as it expected the tax cut and spending plan to add to inflationary pressures. Meanwhile, in another corner of the bank, staff intervened in the bond market, fearing for the country’s financial stability.
Two weeks ago, Ms. Truss resigned, and her successor, Rishi Sunak, has made it clear that he intends to take a different approach to public finances. Later this month, he and the chancellor of the Exchequer, Jeremy Hunt, are expected to announce tax increases and spending cuts alongside a plan to cut Britain’s debt levels. Some calm has been restored to financial markets, and pressure on the Bank of England to sharply raise interest rates has diminished.
But Britain’s outlook remains gloomy and uncertain. A plan to freeze energy bills, which will hold down the headline inflation rate, will last only until April. This winter, average energy bills are about twice as high as last winter, food inflation is at its highest in four decades and many households are looking ahead to sharp increases in their mortgage payments. With customers aiming to reduce spending, corporations are warning about lower profits, and many companies and services are facing disruption from ongoing labor disputes.
