Bank of England raises interest rates in bid to tame inflation
The United Kingdom’s central bank has made its biggest increase to interest rates in 27 years in a bid to smother soaring inflation and warned the country faces a long recession ahead.
Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the Bank of England’s (BOE) Monetary Policy Committee voted 8-1 on Thursday for a half percentage point rise in its key interest rate to 1.75 percent.
The rate is now at its highest level since the depths of the global financial crisis in December 2008.
The BOE predicted that inflation will reach in excess of 13 percent in the final three months of the year – its highest level for 42 years – and remain “very elevated” for much of 2023.
It also warned that the UK was facing a recession with a peak-to-trough fall in output of 2.1 percent, similar to a slump in the 1990s but far less than the hit from the COVID-19 pandemic and the downturn caused by the global financial crisis.
The economy will begin to shrink in the final quarter of 2022 and contract throughout all of 2023, the bank predicted, making it the longest recession since the 2008 downturn.
Central banks struggle to combat surging inflation
The BOE has been criticised for moving too slowly to combat inflation, which accelerated to a 40-year high of 9.4 percent in June and has driven a cost-of-living crisis. While the central bank has approved five consecutive interest rate increases since December, none before Thursday exceeded a quarter percentage point.
By contrast, the United States Federal Reserve increased its key rate by three-quarters of a point in each of the past two months to a range of 2.25 percent to 2.5 percent. The European Central Bank’s first increase in 11 years was a larger-than-expected half-point rise last month.
Central banks worldwide are struggling to control surging inflation without tipping economies into recession. Higher interest rates raise borrowing costs for consumers, businesses and governments, which tends to reduce spending and ease rising prices. But such moves are also likely to slow economic growth.
The International Monetary Fund last week cut its outlook for global economic growth, citing higher-than-expected inflation, continuing COVID-19 outbreaks in China and further effects from the war in Ukraine.