Add Category
The Bank of England made its biggest interest rate increase in three decades, joining other central banks worldwide in rapid hikes as it tries to beat back stubbornly high inflation.
Key points:
- The central bank boosted its key rate by 0.75 percentage points, to 3 per cent
- The bank predicted a two-year contraction, the longest since 1955
- The increase is the biggest since 1992
The central bank boosted its key rate by 0.75 of a percentage point, to 3 per cent, after consumer price inflation returned to a 40-year high in September.
The aggressive move comes even as the bank predicted a two-year economic contraction through June 2024.
This would be the longest recession since at least 1955, according to the Office for National Statistics.
"If we don't take action to bring inflation down, it gets worse," Bank of England Governor Andrew Bailey said.
"There's no easy outcome in this sense."
Even so, the central bank should not increase its key rate too far, he said, but with uncertainties ahead, policymakers will "respond forcefully" if needed.
The interest rate decision is the first since former prime minister Liz Truss' government announced 45 billion pounds ($80 billion) of unfunded tax cuts that sparked turmoil on financial markets, pushed up mortgage costs and forced her from office after just six weeks.
Her 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.
"High energy, food and other bills are hitting people hard. Households have less to spend on other things. This has meant that the size of the UK economy has started to fall," the bank said in its November monetary policy report.
The rate increase is the Bank of England's eighth in a row and the biggest since 1992.
Central banks struggle with inflation
The move comes after the US Federal Reserve on Wednesday announced a fourth consecutive three-quarter point jump.
In Australia this week the Reserve Bank lifted the cash rate by 0.25 of a percentage point to a nine-year high of 2.85 per cent.
Central banks have struggled to contain inflation after initially believing that price increases were being fuelled by international factors beyond their control.
Their response 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.
The war in Ukraine boosted food and energy prices worldwide as shipments of natural gas, grain and cooking oil were disrupted.
That added to inflation that began to accelerate last year when the global economy began to recover from the COVID-19 pandemic.
Europe has been particularly hard hit by a jump in natural gas prices as Russia responded to Western sanctions and support for Ukraine by curtailing shipments of the fuel used to heat homes and generate electricity.
The UK also has struggled as wholesale gas prices increased fivefold in the 12 months through August. While prices have dropped more than 50 per cent since the August peak, they are likely to rise again during the winter heating season, worsening inflation.
The British government sought to shield consumers with a cap on energy prices. But after the turmoil caused by Ms Truss' economic policies, Treasury chief Jeremy Hunt limited the price cap to six months instead of two years, ending on March 31, 2023.
Even tea is getting more expensive
Meanwhile, food prices have jumped 14.6 per cent in the year through September, led by the soaring cost of staples such as meat, bread, milk and eggs, the Office for National Statistics said.
That pushed consumer price inflation back to 10.1 per cent, the highest since early 1982 and equal to the level last reached in July.
Increases in the cost of tea bags, milk and sugar mean that even the "humble" cup of tea, which people across the country turn to when they need a break from the pressures of daily life, is getting more expensive, the British Retail Consortium said.
"While some supply chain costs are beginning to fall, this is more than offset by the cost of energy, meaning a difficult time ahead for retailers and households alike," said Helen Dickinson, the consortium's chief executive.
Liz Truss's failed economic plan made things worse, driving the pound to a record low against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England would boost interest rates higher than expected. That increased mortgage costs as lenders repriced their products.
The economic turmoil is putting home ownership further out of reach for many young people, according to research released this week by Hamptons, a UK real estate agency.
Mortgage rates average around 6.5 per cent, compared with 2 per cent a year ago.
That means the average first-time homebuyer would have to make a down payment equal to 41 per cent of the purchase price to keep their monthly repayments at the same level as a similar buyer who made a 10 per cent down payment last year, Hamptons said.
AP