On Thursday, the Bank of England made its largest interest rate hike in three decades, joining the U.S. Federal Reserve and other central banks around the world in rapid increases as it tries to fend off stubbornly high inflation fueled by Russian invasion of Ukraine and the disastrous economic policies of former Prime Minister Liz Truss.
The central bank raised the key rate by three-quarters of a percentage point to three percent 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, which would be the longest recession since at least 1955, according to the Office for National Statistics.
“If we don’t take action to reduce inflation, the situation gets worse,” Bank of England Governor Andrew Bailey told reporters. “There is no easy result in this regard.”
Even so, the central bank shouldn’t raise its key rate too much, he said, but with future uncertainties, politicians will “respond strongly” if necessary.
The interest rate decision is the first since the Truss government announced £ 45 billion ($ 69 billion Cdn) of unfunded tax cuts that sparked turmoil in financial markets, pushed up mortgage costs and forced Truss out of office after just six weeks. His successor, Rishi Sunak, has warned of spending cuts and tax hikes as he tries to repair the damage and prove Britain is committed to paying its bills.
“Energy, food and other bills are hitting people hard. Households have less to spend on other things. This means that the size of the UK economy has started to decline,” the bank said in its report. on monetary policy in November.
The rate hike is the Bank of England’s eighth consecutive and largest since 1992. It comes after the US Federal Reserve on Wednesday announced a fourth consecutive three-quarter point hike as central banks around the world fight inflation which is eroding living standards and slowing the growth economy.
Central bank response intensifies
Central banks struggled to contain inflation after initially believing that price increases were fueled by international factors beyond their control. Their response has intensified in recent months as it became clear that inflation was taking root in the economy, fueling rising financial costs and demands for higher wages.
The war in Ukraine has caused food and energy prices to rise around the world as shipments of natural gas, grain and cooking oil have been halted. This added to inflation that began accelerating last year as the global economy began to recover from the COVID-19 pandemic.
WATCH | The British pound falls against the US dollar:
Europe has been particularly hit by a rise in natural gas prices as Russia has responded to Western sanctions and supported Ukraine by reducing shipments of fuel used to heat homes, generate electricity and the energy industry, and European nations vied for alternative supplies to global markets.
The UK also struggled as wholesale gas prices rose fivefold in the 12 months to August. Although prices have dropped more than 50% since their August peak, they are likely to rise again during the winter heating season, worsening inflation.
The British government has tried to protect consumers with a ceiling on energy prices. But after the turmoil caused by Truss’s economic policies, Treasury Chief Jeremy Hunt capped the price cap to six months instead of two years, ending March 31.
Food prices go up, home ownership is out of reach
Meanwhile, food prices rose 14.6 percent in the year through September, driven by the surge in the cost of staples such as meat, bread, milk and eggs, the Office for National Statistics said. This brought consumer price inflation back to 10.1 percent, the highest level since the beginning of 1982 and equal to the level last reached in July.
The rising cost of tea bags, milk and sugar means 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 becoming more expensive, the British Retail Consortium said Wednesday.
“Although some supply chain costs are starting to decline, this is more than offset by the cost of energy, which means a tough time for retailers and households alike,” said Helen Dickinson, chief executive of the consortium. .
Truss’s failed economic plan made matters worse, bringing the pound to an all-time low against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England would raise interest rates more than expected. This has increased mortgage costs as lenders have re-evaluated their products.
Economic turmoil is putting home ownership still out of reach for many young people, according to research published this week by the Hamptons, a British real estate agency.
Mortgage rates are on average around 6.5 percent, up from two percent a year ago.
This means that the average first-time buyer would have to make a down payment equal to 41% of the purchase price to keep their monthly repayments at the same level as a similar buyer who made a 10% down payment last year, has said Hamptons.