Bank of England increases key interest rate to 15-year high  

As per details, the interest rate was raised by a quarter-percentage point to 5.25 percent, which is the central bank’s 14th hike in a row…reports Asian Lite News

To bring down the high inflation, the Bank of England on 3 August increased its main interest rate to a 15-year high.

As per details, the interest rate was raised by a quarter-percentage point to 5.25 percent, which is the central bank’s 14th hike in a row.

Meanwhile, BoE Governor Andrew Bailey said, as reported by news agency Reuters, that the British central bank may have to increase borrowing costs.

“We now need to make sure that inflation gets back to the 2% target and stays there,” Bailey said in a video clip published by the BoE. “Depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain,” Reuters quoted Bailey as saying.

Amid the inflation four times the bank’s 2 percent target, economists say the interest rate outlook will depend largely on how fast inflation comes down.

The BoE said inflation is expected to drop to 4.9% by the end of 2023, with food price rises set to moderate.

“Inflation is falling, and that’s good news,” Governor Andrew Bailey said. “We know that inflation hits the least well-off the hardest, and we need to make sure that it falls back to the 2 percent target,” he added.

“I don’t think it’s time to declare that it’s all over and sticking where we are for the moment. We have to remain evidence-driven,” Bailey told reporters.

Last week, both US Federal Reserve and the European Central Bank raised rates.

Not only the US and ECB, but central banks across the globe have been raising borrowing costs to combat inflation that has been unleashed by higher energy prices following the Russian invasion of Ukraine and supply chain backups as the global economy recovered from the coronavirus pandemic.

Higher interest rates dampen inflation as it makes it more expensive for consumers and businesses to borrow to buy homes, cars, or equipment.

However, “depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain,” central bank governor Andrew Bailey said in a video posted to Twitter on Thursday.

Before Thursday’s hike, financial markets were predicting the Bank of England’s benchmark interest rate would peak at 5.75% by the end of the year as the central bank tries to rein in rising prices.

Kallum Pickering, senior economist at Berenberg, wrote in a note Tuesday that “probably less than half” of previous rate hikes “has passed through into the real economy so far.

“The UK thus faces many more months of de facto policy tightening to come even after policymakers stop raising the bank rate,” he added.

Inflation in the UK is still stubbornly high despite having eased back in recent months. Consumer price inflation was 7.9% in June, down from its 41-year high of 11% in October 2022, but still the highest level among the Group of Seven rich nations, and well above the Bank of England’s target rate of 2%.

Core inflation — which strips out volatile food and energy costs — also dropped to 6.9% last month from 7.1% in May, which was its highest rate in 31 years.

Bailey told reporters Thursday that the “evidence is now clear” that tighter monetary policy had helped bring inflation down, and that he expected the rate of price rises to “continue to fall over the coming months.”

The central bank now forecasts that inflation will fall to 4.9% in the last quarter of this year, in line with UK Prime Minister Rishi Sunak’s promise to voters back in January to halve inflation to around 5%.

A fall in energy prices has driven the declines, Bailey said, but it will take time for the falling cost of fuel and gas to be fully reflected in consumer price inflation data.

The central bank also said in a report, published Thursday, that annual wage growth had come in “materially above” its expectations, rising by an average rate of 7.7% in the three months to May.

Excluding volatility in wages during the pandemic, that was the highest rate since the central bank started collecting wage growth data back in 2001.

Interest rates in the UK and most developed economies have been at or close to record lows ever since the global financial crisis of 2008.

Most central banks slashed rates, often all the way to zero, in response to the economic upheaval, trying to spur a recovery and a return of modest levels of inflation. As this process proved extremely slow, the rates stayed in previously uncharted territory for years.

However, a combination of the aftermath of the COVID pandemic and Russia’s invasion of Ukraine caused a rapid rise in inflation that began in late 2021 and carried forward into the middle of 2022 — forcing a number of central banks to raise their rates again.

Most, including the UK’s, now sit roughly where they did prior to the 2008 financial crisis.

ALSO READ-Bank of England hikes borrowing rates

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