The Bank of England raised interest rates by 0.5 percentage points on Thursday, raising the prospect of another big hike in November as central banks around the world seek to tame inflation.
The rise, to 2.25%, the UK’s highest level since 2008, came as central banks around the world tightened policy following a third straight increase of 0.75 percentage points by the US Federal Reserve.
Switzerland and South Africa raised interest rates by 0.75 percentage points, while Norway rose by 0.5 percentage points and Japan stepped in to strengthen the yen for the first time. in 24 years.
The BoE’s move was weaker than markets had expected and the British pound then pared its gains for the day against the US dollar to around $1.13; it is still trading near its lowest level since 1985 against the US currency.
Central banks around the world are rapidly raising interest rates as they seek to tackle the worst bout of inflation in decades, with the Fed leading the charge. But the majority of the BoE’s monetary policy committee resisted pressure to keep pace with the Fed, reflecting concerns about the state of Britain’s economy.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the move provided “reassurance that it was focused on the outlook for consumer price inflation and evidence of an emerging easing in the economy.” economy, rather than arbitrarily following the Joneses”.
The BoE said it now expects UK gross domestic product to fall 0.1% in the third quarter of the year, down from a growth forecast of 0.4% in August. It would mark a second consecutive quarter of declines, cementing fears that the economy could slide into recession.
He also suggested he would wait until November, when he updates his forecast, to get a firmer view of the new UK government‘s fiscal policy, which will be unveiled in a mini-budget on Friday.
Even as the central bank seeks to contain inflation, Kwasi Kwarteng, the new chancellor, is set to try to revive the economy with debt-financed tax cuts and an emergency plan to contain energy bills.
The MPC said that “if the outlook suggests more persistent inflationary pressures, including from stronger demand, the committee would respond forcefully, if necessary.”
Economists said that leaves the way open for the BoE to offset the impact of the tax cuts with a big rate hike at the November meeting. “In short, the Bank has indicated that it will raise rates further to offset some of the increased demand due to the government’s fiscal plans,” said Paul Dales, chief UK economist at Capital Economics.
The MPC said the government’s energy price guarantee would reduce inflation in the short term, with the CPI now likely to peak at just under 11% in October, earlier than expected – contrary to previous forecasts from the private sector by about 15% Next year.
But he said inflation would hover around 10% for several months, not necessarily low enough to dampen expectations of sharp price increases.
“Many of our members believe that the woodpecker [in inflation] will come next year and therefore could price accordingly, running the risk that inflationary expectations become self-fulfilling,” said Kitty Ussher, chief economist at the Institute of Directors.
In its deliberations on Thursday, the committee split into three parties, with the majority – including BoE Governor Andrew Bailey and chief economist Huw Pill – voting for the 0.5 percentage point move.
Three members – Jonathan Haskel, Catherine Mann and Deputy Governor Dave Ramsden – favored a bigger hike of 0.75 percentage points, arguing that acting faster now could help the BoE avoid “a longer tightening cycle”. long and more expensive later”.
Swati Dhingra, a newcomer to the committee, favored a more modest move of 0.25 percentage points on the grounds that economic activity was already weakening.
The BoE also confirmed that it would continue with plans presented in August to reduce the stock of assets it had accumulated under previous quantitative easing programs. It is targeting £80bn in gilt sales over the next 12 months, which would bring total assets on its balance sheet down to £758bn.