HomeLatest NewsThe Bank of England raises interest rates but avoids more aggressive action

The Bank of England raises interest rates but avoids more aggressive action

It is the seventh consecutive move by the Bank of England to raise borrowing costs as rising food and energy prices fuel a cost-of-living crisis considered the worst in a generation.

It is the seventh consecutive move by the Bank of England to raise borrowing costs as rising food and energy prices fuel a cost-of-living crisis considered the worst in a generation.

Britain’s central bank on Thursday raised its key interest rate by another half-percentage point to a 14-year high, but it avoided more aggressive steps to control inflation taken by the U.S. Federal Reserve and other banks.

It is the seventh consecutive move by the Bank of England to raise borrowing costs as rising food and energy prices fuel a cost-of-living crisis considered the worst in a generation. Despite facing deflation, a tight labor market and inflation near four-decade highs, officials decided against acting more emboldened as they forecast a second straight decline in economic output this quarter, a longstanding unofficial definition of recession.

The bank matched its half-point increase last month – the biggest in 27 years – bringing its benchmark rate to 2.25%. The decision was delayed for a week as the United Kingdom mourned Queen Elizabeth II and new Prime Minister Liz Truss’ government unveiled a massive relief package aimed at helping consumers and businesses cope with skyrocketing energy bills.

Bank policymakers said the measures reduced uncertainty over energy prices and could “significantly limit further increases” in consumer prices. They expected inflation to peak at 11% in October, lower than earlier forecasts.

“Nevertheless, energy bills will still rise and inflation is expected to remain above 10% in the next few months, before starting to ease, coupled with the indirect effect of higher energy costs,” the Monetary Policy Committee said.

The UK decision comes in a busy week for central bank action marked by much more aggressive moves to lower rising consumer prices.

The US Federal Reserve raised rates by three-quarters of a point for the third straight time on Wednesday and forecast a bigger increase. Also on Thursday, the Swiss central bank implemented its largest-ever increase in key interest rates.

Rising inflation is a concern for central banks as it erodes consumer purchasing power. The traditional tool to combat inflation is to raise interest rates, which reduces demand and therefore prices, making it more expensive to borrow money.

Inflation in the United Kingdom is running at 9.9%, near the highest level since 1982 and five times higher than the Bank of England’s 2% target. The British pound is at its weakest against the dollar in 37 years, contributing to import inflation.

To ease the crisis, the Truss government has announced it will cap energy bills for households and businesses as the price of natural gas needed for heating rises due to Russia’s war in Ukraine.

The Treasury is expected to release a “mini-budget” on Friday with more economic stimulus measures, and the bank said it would not be able to assess how it would affect inflation until its next meeting in November.

The Bank of England expects gross domestic product to contract 0.1% in the third quarter, below its August projection of 0.4% growth. This would be a second quarterly decline after an Office of National Statistics estimate that output fell by 0.1% in the second quarter.

The bank avoided pressure to grow even as other banks around the world took aggressive measures against deflation due to the global economic recovery from the Covid-19 pandemic and then the war in Ukraine.

This month, Sweden’s central bank raised its key interest rate by a full percentage point, while the European Central Bank made its biggest rate hike for the 19 countries that use the euro currency, with a three-quarter point increase.

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