Bank of England : In a determined effort to curb skyrocketing inflation, the Bank of England has announced its 14th consecutive rate hike, raising it to a fresh 15-year high. With little room for manoeuvre and inflation stubbornly remaining four times above the planned 2 per cent, the central bank is taking aggressive actions to stabilize the economy. Economists forecast a quarter-point increase, moving the benchmark rate to 5.25 per cent, but the door remains open for more aggressive measures in the future.
This latest rate hike comes in the backdrop of June’s outsized half-point increase, which sent shockwaves through hard-pressed households and companies. However, a glimmer of hope emerged when last month’s numbers showed inflation decreasing to 7.9 per cent, slightly more favourable than previously predicted. This short respite has provided the Bank of England some breathing space, allowing for a more measured response this time.
Kallum Pickering, a senior economist at Berenberg Bank, adds, “With inflation still raging high, the Bank of England has little choice but to raise the bank rate once more, while keeping the option open for further hikes in upcoming meetings.” This move diverges from the courses chosen by the US Federal Reserve and the European Central Bank, both of which recently hiked rates but are considering a halt due to a steeper decrease in inflation in their respective countries. In the United States, price surges have slowed to 3 per cent, while the euro currency zone enjoys a more mild 5.3 per cent inflation rate across 20 countries.
The rate hike tsunami is not limited to the UK; central banks globally are coping with increasing inflation spurred by rising energy prices and lingering supply chain problems following the coronavirus outbreak. The uncertainty brought about by Russia’s invasion of Ukraine added more complication to the global economic recovery, necessitating a proactive approach to prevent inflation.
Bank of England & Factors Contributing
Numerous factors contribute to the UK’s elevated inflation rate. Economists attribute part of the blame to Britain’s departure from the European Union (Brexit), which disrupted trade and increased expenses for firms. However, other experts point fingers at the Bank of England itself for not responding rapidly enough to boost interest rates, thus allowing inflation to spread across the economy, most notably through higher wages.
Higher interest rates are a double-edged sword, as they do help to limit inflation but also pose a risk to economic growth. By making borrowing more expensive for households and businesses alike, increased rates could effect purchasing decisions for homes, automobiles, and equipment, thereby slowing down economic activity.
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