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| Photo Credit: AP. |
LONDON (AP) — The Bank of England raised its key interest rate Thursday by another half-percentage point to the highest level in 14 years, but despite facing inflation that outpaces other major economies, it avoided more aggressive hikes made by the U.S. Federal Reserve and other central banks.
It is the
Bank of England’s seventh straight move to increase borrowing costs as rising
food and energy prices fuel a cost-of-living crisis that is considered the
worst in a generation. Despite facing a slumping currency, tight labor market
and inflation near its highest level in four decades, officials held off on
acting more boldly as they predicted a second consecutive drop in economic
output this quarter, an informal definition of recession.
The bank
matched its half-point increase last month — the biggest in 27 years — to bring
its benchmark rate to 2.25%. The decision was delayed for a week as the United
Kingdom mourned Queen Elizabeth II and comes after new Prime Minister Liz
Truss’ government unveiled a massive relief package aimed at helping consumers
and businesses cope with skyrocketing energy bills.
The new
measures have eased uncertainty over energy costs and are “likely to limit
significantly further increases” in consumer prices, the bank’s policymakers
said. They expected inflation — now at 9.9% — to peak at 11% in October, lower
than previously forecast.
“Nevertheless, energy bills will still go up
and, combined with the indirect effects of higher energy costs, inflation is
expected to remain above 10% over the following few months, before starting to
fall back,” the monetary policy committee said.
The bank
signaled it is prepared to respond more forcefully at its November meeting if
needed. Its decision comes during a busy week for central bank action marked by
much more aggressive moves to bring down soaring consumer prices.
The U.S.
Federal Reserve hiked rates Wednesday by three-quarters of a point for the
third consecutive time and forecast that more large increases were ahead. Also
Thursday, the Swiss central bank enacted its biggest-ever hike to its key
interest rate.
Three of the
British bank’s nine committee members wanted a similar three-quarter-point
raise but were outvoted by five who preferred a half-point and one who voted
for a quarter-point.
The decision
“suggests the Bank of England is concerned about the UK’s economic
deteriorating outlook amid the looming threat of recession,” said Victoria
Scholar, head of investment at interactive investor. “The timid increase will
do little to stem the slide in sterling but may avoid inadvertently inducing
unnecessary pain for the economy which is already grappling with slowing demand
and deteriorating confidence.”
Surging
inflation is a worry for central banks because it saps economic growth by
eroding people’s purchasing power. Raising interest rates — the traditional
tool to combat inflation — reduces demand and therefore prices by making it
more expensive to borrow money for big purchases like cars and homes.
Inflation in
the United Kingdom hit 9.9% in August, close to its 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 imported
inflation.
To ease the
crunch, Truss’ government announced it would cap energy bills for households
and businesses that have soared as Russia’s war in Ukraine drives up the price
of natural gas needed for heating.
The Treasury
is expected to publish a “mini-budget” Friday with more economic stimulus
measures, and the bank said it won’t be able to assess how they will affect
inflation until its November meeting..
The Bank of
England expects gross domestic product to fall by 0.1% in the third quarter,
below its August projection of 0.4% growth. That would be a second quarterly
decline after official estimates showed output fell by 0.1% in the previous
three-month period.
The weakness
partly reflects a smaller-than-expected rebound after an extra June holiday to
celebrate the queen’s 70 years on the throne and the impact of another public
holiday Monday for her funeral, officials said.
The bank
avoided pressure to go bigger even as other banks around the world take
aggressive action against inflation fueled by the global economy’s 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 delivered its largest-ever rate increase with a
three-quarter point hike for the 19 countries that use the euro currency.
But British
policymakers signaled they will “respond forcefully, as necessary” if there are
signs that inflationary pressure is more persistent than expected, “including
from stronger demand.”
The bank
said it’s also moving ahead with plans to trim its bond holdings built up under
a stimulus program, selling off 80 billion pounds ($90 billion) worth of assets
over the next year to bring its portfolio down to 758 billion pounds.