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The Bank of England didn’t quite keep pace with the Federal Reserve this month, but it did make big interest rate hikes nonetheless.
UK policymakers raised a half-point increase – the same amount as in August – to bring the benchmark down to 2.25%.
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Three of the nine rate-setters voted for a three-quarter point move, matching the Federal Reserve’s momentum as seen in June, July and September. One policy maker backed the quarter-point move.
The BoE now predicts that the inflation rate will reach around 11% in October, having dropped to less than 13%. Europe is facing an energy crisis after Russia cut off natural gas supplies. Britain’s new prime minister, Liz Truss, has announced an electricity price cap for households, while oil prices continue to fall. At the same time, unemployment remains low and wage benefits are rising.
“If the outlook suggests more persistent inflationary pressures, including stronger demand, the committee will respond forcefully,” the central bank said in a statement.
energy support measures This winter should avert an imminent economic collapse, averting the threat that households will either be unable to heat their homes, or may be trying to go bankrupt.
But the package also equates to a huge amount of stimulus when the BoE tightens. Economists estimate it will cost £100 billion ($113 billion) a year, more than what was spent on the furlough program to pay workers’ wages during the pandemic.
This means that the central bank may be able to move slower over the next few months to prevent inflation expectations from climbing too quickly, but will eventually have to raise rates to a higher endpoint to ensure inflation is ensured. Implied.
“The economy is going to be in a better shape because of the support package,” said George Buckley, an economist at Nomura. Still, the BoE has not raised rates “anywhere near how far it is needed.”
The UK economy is fragile. Production has held steady over the past six months, and Nomura’s Buckley began contracting in the third quarter, falling 1.5% before picking up again.
The pound is also historically weak. It fell 16% against the dollar this year to its lowest level since the 1980s, as the Fed continues to hike interest rates in big moves, even as it begins to tighten after the BoE. The pound declined 4% against the euro, the currency used by the UK’s largest trading partner.
Inflation well above its 2% target, the threat of a recession, and a weak currency create an unreliable outlook for the BoE. This month’s interest rate decision was delayed by a week due to the death of Queen Elizabeth II.
On Friday, Chancellor of the Exchequer Quasi Quarteng will address parliament to give more details about the energy aid package. He is also expected to confirm that the recently announced tax hike will be reversed to help spur growth.
The central bank is scheduled to update its forecast and hold a press conference on the next decision in November.
For now, the state of the economy and the new government’s measures are creating uncertainty for the Bank of England. But the immediate action is clear – interest rates will continue to rise.
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