The Bank of England on Thursday raised interest rates by its biggest rate in three decades, joining the U.S. Federal Reserve and other central banks worldwide in rapid hikes as they try to beat stubbornly high inflation fueled by Russia’s invasion of Ukraine and disastrous economic policies. former Prime Minister Liz Truss.
The central bank raised its key interest rate by three quarters of a percentage point to three percent after consumer price inflation returned to its 40-year high in September. The aggressive move comes despite the bank forecasting a two-year economic contraction until June 2024, which would be the longest recession since at least 1955, according to the Office for National Statistics.
“If we don’t take action to lower inflation, it will get worse,” Bank of England Governor Andrew Bailey told reporters. “In that sense, there is no easy outcome.”
Even so, the central bank should not raise its key rate too far, he said, but given the uncertainties, policymakers will “respond strongly” if necessary.
The rate decision is the first since the Truss government announced 45 billion pounds (Cdn69 billion) in unfunded tax cuts that sent financial markets into turmoil, drove up mortgage costs and forced Truss out after six weeks. His successor, Rishi Sunak, has warned of spending cuts and tax rises as he tries to repair the damage and show Britain is committed to paying its bills.
“High energy, food and other bills are hitting people hard. Households have less money for other things. This has meant that the size of the UK economy has started to shrink,” the bank said in its November monetary policy report.
The rate hike is the Bank of England’s eighth in a row and the biggest since 1992. It comes after the U.S. central bank on Wednesday announced a fourth straight hike of three-quarters of a point as central banks worldwide battle inflation that is eroding living standards and slowing the economy. growth.
The central banks’ response is getting stronger
Central banks have struggled to contain inflation after initially believing that price increases were driven by international factors beyond their control. Their reaction intensified in recent months as it became clear that inflation had taken root in the economy, contributing to higher borrowing costs and demands for higher wages.
The war in Ukraine raised food and energy prices worldwide as supplies of natural gas, grain and cooking oil were disrupted. This added to inflation, which began to accelerate last year as the global economy began to recover from the COVID-19 pandemic.
SEE | The British pound weakened against the US dollar:
Europe has been hit particularly hard by rising natural gas prices as Russia responded to Western sanctions and support for Ukraine by limiting supplies of the fuel used for heating homes, power generation and the energy industry, and European countries competed for alternative supplies on the global market. .
Great Britain has also struggled with the wholesale price of gas rising fivefold in the 12 months to August. Although prices are down more than 50 percent from their August peak, they are likely to rise again in the winter heating season, exacerbating inflation.
The British government sought to protect consumers with an energy price cap. But following turmoil over Truss’s economic policy, Chancellor of the Exchequer Jeremy Hunt limited the price cap to six months instead of two years, ending on March 31.
Food prices jump, home ownership out of reach
At the same time, food prices have risen by 14.6 percent until September of the year, which was due to the skyrocketing rise of basic goods such as meat, bread, milk and eggs, the statistics office said. This pushed consumer price inflation back to 10.1 percent, the highest since early 1982 and the same level last reached in July.
Rising prices for tea bags, milk and sugar mean even the “humble” cup of tea is what people across the country are turning to when they need a break from the pressures of everyday life, the British Retail Consortium said on Wednesday.
“While some supply chain costs are starting to come down, this is being more than offset by energy costs, which means a tough time for both retailers and households,” said Helen Dickinson, chief executive of the consortium.
Truss’s failed economic plan worsened the situation, sending the pound to a record low against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England would raise interest rates higher than expected. This increased mortgage costs as lenders re-priced their products.
According to research published this week by British real estate agency Hamptons, economic turmoil is putting home ownership even more out of reach for many young people.
Average mortgage interest rates were around 6.5 percent, compared to two percent a year ago.
That means the average first-time home buyer would have to pay a down payment of 41 percent of the purchase price to keep monthly payments on par with a similar buyer who paid a 10 percent down payment last year, Hamptons said. .
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