London — The bank of england To curb rising inflation, the fifth consecutive hike in interest rates was implemented on Thursday.
The Monetary Policy Committee voted 6-3 to raise the bank rate by 25 basis points to 1.25%, with three dissatisfied members voting for an increase of 50 basis points to 1.5%.
The committee said in a statement on Thursday that it will take “necessary action to permanently return inflation to the 2% target over the medium term” with the scale, pace and timing of any further hikes, depending on the economic outlook and inflationary pressures. will do”. ,
“The Committee will be particularly alert for signs of more persistent inflationary pressures, and will take coercive action in response if necessary,” the bank said.
pound It declined against the dollar soon after the announcement, but recovered most of its losses to trade above the handle of $1.21.
Policymakers are faced with the incredible task of bringing consumer prices under control against a backdrop of slowing growth and a rapidly depreciating currency, while the UK faces a major cost of living crisis.
At its May meeting, Bank hikes base rate by 25 basis points to 1%Its highest level for 13 years, but warned the British economy risks falling into recession.
Since then, the latest data has shown that UK inflation hits 40-year high of 9% As food and energy prices rise annually in April. The Bank now expects inflation to rise to “slightly above 11%” in October, reflecting higher projected domestic energy prices following an expected further increase in the UK energy price cap.
Inflation is rising around the world due to rising food and energy prices, exacerbated by fears of war in Ukraine and supply in agricultural commodities. Supply chain disruptions and demand changes as a result of the pandemic have also pushed up the prices of tradable goods.
However, in its statement on Thursday, the MPC acknowledged that all additional inflationary pressures cannot be chalked out to global events, noting that domestic factors such as a tight labor market and firms’ pricing strategies have contributed to also played a role.
“Price inflation of consumer services, which is more influenced by domestic costs than by price inflation of goods, has strengthened in recent months. In addition, price inflation of core consumer goods is comparable to that of the euro area in the United Kingdom and the United States. more,” the bank said.
Economy unexpectedly shrank 0.3% in April After a 0.1% contraction in March, there has been a back-to-back fall for the first time since April and March 2020, and the OECD forecasts the UK will be the weakest G-7 economy next year because of higher interest rates, tax hikes, Low trade and rising food and energy prices have stirred homes.
Bank of England’s move distracted by more aggressive actions US Federal Reserve on Wednesday and Swiss National Bank Earlier on Thursday. The Fed rose 75 basis points, the biggest since 1994, while the SNB rose 50 basis points, higher than market expectations.
‘Case study’ for central banks
Vivek Paul, UK Chief Investment Strategist at BlackRock Investment Institute, said the Bank of England was the first among its peers to initiate the process of monetary policy normalization, and is now following a tough path facing the most acute risks- duration increase. This means it could serve as a “case study” of how central banks around the world will react if recession risks increase.
“We think market expectations of future UK rates will eventually prove to be higher. According to the Bank’s own data, a recession is a real risk – and recent government initiatives to ease the crisis cost the UK may prove to be insufficient to address consumer weakness,” Pal said.
“Ultimately, the bank has less headroom for growth than the US: the neutral rate of interest – which neither overly stimulates nor restricts economic growth – is low, and the country’s high debt-to- The greater sensitivity of debt servicing to the GDP ratio implies the cost of rate increases.”
With rising gas prices continuing to put consumer prices under pressure this year, all banks can “send a clear message” to other price setters on Thursday, said Karen Ward, EMEA’s chief market strategist at JPMorgan Asset Management. The economy that a 10% price increase is not “an acceptable new normal”.
“It had to show that it didn’t soften on inflation, or financially lower inflation expectations,” Ward said.
“In our view, an increase of 50 basis points would have sent that signal more appropriately. It is possible that acting cautiously today, it may have to give more down the line.”