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The United Kingdom is working hard now to catch up in the fight against inflation. The Bank of England has raised interest rates by 50 basis points (.5%) to 1.75%. Rates are still historically very low, though the BOE has raised them at each of its last six meetings. Will Horner reports for The Wall Street Journal:
The Bank of England raised its key interest rate by a half percentage point Thursday, the largest single step in more than a quarter-century, as the central bank follows the Federal Reserve in giving priority to the fight against inflation over the risk of hurting growth.
In a statement, the bank raised its key rate to 1.75% from 1.25%. That means the bank has increased borrowing costs at six straight meetings of its monetary policy committee, its longest such streak since the late 1990s.
The bank offered a particularly bleak outlook for the U.K., saying the economy was poised to enter recession, that inflation would continue to rise well above its current four-decade high and that household income would fall sharply.
Still, eight bank officials voted for the larger than usual rate increase, reasoning that the cost of not acting aggressively to bring inflation under control would mean greater pain in the longer term. One bank official voted to raise rates by a more modest 0.25 percentage points. Thursday’s increase was the largest since 1995 and the first half-point increase since the bank was granted independence in 1997.
The British economy is expected to contract for five consecutive quarters beginning in the final three months of 2022, a recession as long as the one that followed the financial crisis but not as deep, the bank said.
While the half-point increase was broadly expected, the dire warning about the fragility of the U.K. economy took markets aback. The British pound erased earlier gains to fall against the dollar and the yield on the U.K.’s benchmark 10-year bond fell to 1.857% from 1.929% on Wednesday, following the statement.
“I think it was the monetary policy equivalent of a horror show,” said Elliot Hentov, head of macro policy research at State Street Global Advisors. “It is all-round bad: High inflation, deep recession, long recession, cuts to real income, a loss of purchasing power, wealth and prosperity and they are probably right too.”
The bank has opted to follow a path set by its counterparts in the Federal Reserve: viewing soaring inflation as a risk warranting larger than usual jumps in interest rates, even if that puts economic growth in jeopardy.
