Bank of England stays the course with ‘forceful’ rate hike
The Bank of England announced another “forceful” increase in interest rates Thursday, saying it was too soon to declare victory against inflation that has slowed slightly but is still fuelling a cost-of-living crisis, public-sector strikes and fears of recession.
The bank raised its key rate by half a percentage point, to four per cent, resisting the temptation to follow the United States Federal Reserve in easing its response to the crisis. The British central bank has approved four straight increases of a half-point or more since Russia’s invasion of Ukraine triggered sharp rises in food and energy prices.
“We have done a lot on rates already … but it is too soon to declare victory just yet,” central bank Governor Andrew Bailey said at a news conference. “Inflationary pressures are still there … and we need to be absolutely sure that we really are turning the corner on inflation.”
Even so, the bank moderated expectations for further rate increases, dropping suggestions that it would respond “forcefully” to price pressures and implying that future moves would be smaller. Getting rid of that language was intentional and designed to send a signal to financial markets, Bailey said.
Central bankers worldwide are struggling to balance competing economic demands as they try to rein in inflation, which erodes savings and increases costs for consumers and businesses, without unnecessarily hurting economies that are still recovering from the effects of the COVID-19 pandemic.
The Federal Reserve has started tapering its response, boosting its key rate by just a quarter-point Wednesday. The European Central Bank, meanwhile, went big again Thursday, approving another half-point increase.
Economists had previously suggested that the Bank of England’s decision Thursday would be the last big rate increase after inflation slowed to 10.5 per cent in December from a 41-year high of 11.1 per cent two months earlier.
The bank said the outlook for Britain’s economy is better than it was three months ago, with a steep decline in natural gas prices expected to reduce the squeeze on consumers and investment.
It expects inflation to fall sharply in the second half of this year and keep dropping to below the bank’s two per cent target by June 2024.
As a result, the bank says the United Kingdom is likely face a less severe recession than previously forecast, with the overall size of the economy shrinking less than one per cent over the next two years. A recession is often defined as at least two consecutive quarters of declining economic activity, though economists differ on how to measure it.
“This is nevertheless a much shallower decline than expected” in November, Bailey said. “The projected downturn in the economy, while still technically a recession by common definition, is now significantly milder than past recessions.”
The International Monetary Fund said this week that the UK was on track to be the only major economy to shrink this year, even as the outlook for the rest of the world improves.
Higher interest rates tend to crimp price rises because they increase the cost of mortgages, credit cards and other loans. But that also reduces demand for goods and services, slowing economic growth. The impact of rate hikes takes months to filter through into the wider economy, so policymakers have to make educated guesses about when to moderate their intervention.
Bailey warned that further rate increases would be needed if inflation turned out to be more persistent than expected, adding that there was plenty of uncertainty around the bank’s forecasts.