The Bank of England has implemented the eighth and final rate increase for 2022
LONDON (Reuters) – The Bank of England on Thursday raised interest rates by a widely expected 50 basis points (bps) to 3.50%, in its eighth increase this year.
The Bank of England (BoE) has raised interest rates to their highest level since late 2008 by increasing them by a combined 325 basis points (3.25%) in 2022 alone. This is because the BoE is attempting to combat double-digit inflation, which has resulted in a crisis related to the cost of living and is driving the economy deeper into recession.
The Bank of England was the first of the world’s major central banks to start a monetary-tightening policy cycle when it raised interest rates in the United Kingdom in December of 2021.
Following the release of the consumer prices index (CPI) in November, which indicated annual inflation of 10.7%, members of the monetary policy committee (MPC) of the central bank decided to raise the cost of borrowing money.
The majority of the members of the rate-setting committee at the Bank of England agreed that the base rate needed to be raised for the ninth time in the last year in order to achieve the Bank’s aim of 2% inflation by 2025.
In a letter to the finance minister Jeremy Hunt that was included with the decision, Bank of England Governor Andrew Bailey said that the BoE forecasts suggested that the peak of British inflation had been reached. Inflation in the United Kingdom fell below October’s 41-year highs to 10.7% last month.
The value of the pound plummeted, and benchmark rates on British government bonds went down, reaching 3.24% after a drop of 6 basis points.
The move brings interest rates in the United Kingdom to their highest level since October 2008, and it comes amid widespread forecasts that the country would enter a long, protracted recession. After the Monetary Policy Committee (MPC) raised the cost of borrowing by 0.75 percentage points at its meeting in November, this signalled the beginning of a slowdown in the pace of rate rises.
Although the headline rate of inflation in the UK decreased in November to 10.7% from 11.11% in the previous month, the Bank of England did not support a reduced increase since food and energy price hikes continued to be substantial.
The rise was heavily trailed by the governor, Andrew Bailey, and the chief economist, Huw Pill, after they said “more needed to be done” to bring down inflation, but a repeat of November’s 0.75 percentage point rise was unlikely to occur. The rise was anticipated by the financial markets and was heavily followed by both of them.
The Monetary Policy Committee (MPC) said that there were “considerable uncertainties around the outlook” after a vote that resulted in a three-way split, and which saw two members of the nine-strong MPC opting to keep the base rate on quo and another member pushing for a more aggressive climb.
Although global supply chain bottlenecks have been less of an issue, resulting in a decrease in the price of a variety of commodities and items after dramatic increases earlier in the year, cost pressures have continued to be felt throughout the world’s marketplaces.
Because of the severe winter weather that has affected a large portion of Europe, it is possible that the price of fuel and the cost of food will continue to climb, which will maintain inflation at a higher level for a longer period of time.
Following forecasts that there is a strong prospect of a recession and job losses across the industrialised world, the European Central Bank and the Federal Reserve of the United States have both signalled that they will ease back on their plans to raise interest rates in 2023.
The ongoing invasion of Ukraine by Russia continues to cause disruptions in the supply of energy and some commodities, which adds to the pressures of inflation.
According to the study issued by the Bank, there were a number of signs demonstrating that the economy has been worse since the summer. After a decrease of 0.2% in the previous quarter, it is anticipated that the gross domestic product (GDP) would decline by 0.1% in the last quarter of 2022. This will throw the economy of the United Kingdom officially into a recession. It is anticipated that the decline would continue far into 2023.
The number of house purchases has dropped to below 60,000 a month, which is the lowest it has been since 2013, providing a strong indicator that the housing market is faltering.
When it comes to determining the health of the economy as a whole, bank officials rely on regional agents. Even though “mentions of uncertainty in the agents’ reports had fallen back somewhat in recent weeks,” the Bank’s agents found that business investment had decreased over the past few months, and surveys of confidence among industry leaders showed that they remained wary, despite the reports.
Two members of the Monetary Policy Committee, both professors at the London School of Economics (LSE), Swati Dhingra and Silvana Tenreyro, stated that the economy would slow even without additional rate hikes due to the cost of living crisis that is affecting millions of households as well as the fact that interest rate increases have already led to higher mortgage costs.
In comments relayed by officials in the Bank’s accompanying report, they said: “The lags in the effects of monetary policy meant the sizeable impacts from past rate increases were still to come through.
“That implied the current setting of [the base] rate was more than sufficient to bring inflation back to target in the medium term.”
According to reports, Catherine Mann, a former chief economist at the United States Citibank , believed that a rise of 0.75 percentage points was necessary in order to “reinforce the tightening cycle, importantly leaning against an inflation psychology that was embedding in wage settlements and inflation expectations.” She did not win the vote.
The results of surveys of salary settlements in the private sector suggest that they have not changed from 4%. According to the data provided by official sources, incomes have been growing at a rate of around 6%, despite the fact that this number is being driven by significant increases in compensation throughout the financial and business services industries.
online sources: theguardian.com, yahoo.finance.com, reuters.com
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