The central bank raised its key interest rate by three-quarters of a percentage point to 3% after consumer price inflation returned to a 40-year high in September. The aggressive move comes even as the bank forecast a two-year economic contraction to June 2024, which would be the biggest recession since at least 1955, according to the Office for National Statistics. “If we don’t take action to reduce inflation, it will get worse,” Bank of England Governor Andrew Bailey told reporters. “There is no easy outcome in this sense.” Even so, the central bank should not raise its key rate too much, he said, but with uncertainties ahead, policymakers would “respond strongly” if necessary. The rate decision is the first since the Truss government announced 45 billion pounds ($69 billion Cdn) of unfunded tax cuts that rattled financial markets, drove up mortgage costs and forced the Truss to abandon the office after just six weeks. Her successor, Rishi Sunak, has warned of spending cuts and tax rises as he tries to undo the damage and show 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 means the size of the UK economy is starting to shrink,” the bank said in its monetary policy report. November policy. The rate hike is the Bank of England’s eighth in a row and the biggest since 1992. It comes after the U.S. Federal Reserve on Wednesday announced a fourth consecutive three-quarter hike as central banks worldwide tackle inflation that is eroding the standard of living and slows economic growth.
Reactions from central banks are intensifying
Central banks struggled to contain inflation after initially believing that price increases were being fueled by international factors beyond their control. Their response intensified in recent months as it became clear that inflation was building into the economy, leading to higher borrowing costs and demands for higher wages. The war in Ukraine has driven up food and energy prices worldwide as shipments of natural gas, grain and cooking oil have been disrupted. This added to inflation that began to accelerate last year as the global economy began to recover from the COVID-19 pandemic. WATCHES | British Pound Falls Against US Dollar:
The British pound hits a record low against the US dollar before recovering
The British pound fell to its lowest level against the US dollar since 1985, before recovering on Monday. At one point, it was trading at almost the same level as the dollar. Europe has been hit particularly hard by rising gas prices as Russia responded to Western sanctions and support for Ukraine by curbing shipments of the fuel used for home heating, power generation and the power industry, and European nations compete for alternative supplies in world markets. The UK has also struggled as wholesale gas prices quintupled in the 12 months to August. While prices have fallen more than 50 percent since their peak in August, they are likely to rise again in the winter heating season, exacerbating inflation. The British government tried to shield consumers with a cap on energy prices. But after the turmoil caused by Truss’s economic policies, Chancellor of the Exchequer Jeremy Hunt reduced the price cap to six months instead of two years, ending on March 31.
Food prices skyrocket, home ownership unaffordable
Meanwhile, food prices have jumped 14.6 percent in the year to September, driven by soaring costs of staples such as meat, bread, milk and eggs, the Office for National Statistics said. That pushed consumer price inflation back to 10.1%, the highest since early 1982 and equal to the level last reached in July. Rises 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 everyday life, is getting more expensive, reports British Retail Consortium said on Wednesday. “While some supply chain costs are starting to come down, this is more than offset by energy costs, meaning a tough time for retailers and households,” said Helen Dickinson, chief executive of the British Retail Consortium. (Dado Ruvic/Reuters) “While some supply chain costs are starting to come down, this is more than offset by energy costs, which means a tough time for retailers and households,” said Helen Dickinson, chief executive of the consortium. Truss’ failed economic plan made matters worse, sending the pound to a record low against the dollar, threatening the stability of some pension funds and sparking predictions that the Bank of England would raise interest rates higher than expected. This increased the cost of mortgages as lenders repriced their products. Economic turmoil is making home ownership even more out of reach for many young people, according to research published this week by Hamptons, a UK estate agency. Mortgage rates average about 6.5 percent, compared to two percent a year ago. That means the average first-time homebuyer would have to put down 41 percent of the purchase price to keep their monthly payments on par with a similar buyer who put down a 10 percent down payment last year, Hamptons said. .
