LONDON (AP) — The bank of england raised interest rates for the second time in three months on Thursday, putting the UK well ahead of the rest of Europe and the US in tackling soaring inflation that is weighing on consumers and businesses .
The bank’s monetary policy committee voted 5-4 to raise its key rate from 0.25% to 0.5%, with dissenting members arguing for a bigger increase. He also voted unanimously to start cutting the bank’s holdings of UK government debt and corporate bonds, which it had accumulated to support the economy since the global financial crisis more than a decade ago. .
UK consumer prices rose 5.4% in the year to December, the highest rate of inflation for almost 30 years. And the pressure will only get worse: The UK energy regulator on Thursday announced a 54% increase in gas and electricity prices for households in April, the same month income taxes are expected to increase by 1.5%.
“As the global monetary policy regime shifts from looser to tighter, the Bank of England is forging ahead, pressing forward with decisive action at a time when other central banks are stepping up. behind the inflation curve,” said Victoria Scholar, chief investment officer at Investisseur Interactif.
the US Federal Reserve said last week that it would end its asset purchases in March and likely raise interest rates for the first time in more than three years. Monetary policy makers around the world are trying to contain inflation fueled by rising energy prices and supply shortages as the global economy recovers from the COVID-19 pandemic.
the Central Bank of the Czech Republic also raised rates on Thursday. On the other hand, the European Central Bank gave no indication it would raise rates this year despite record inflation in the 19 countries that use the euro. The bank’s president acknowledged that high consumer prices could persist “longer than expected”, but policymakers decided on Thursday to stick to a cautious recall plan for economic stimulus efforts this year.
With rate hikes come questions about whether they will compound the pressures on average people.
“If we don’t take this action it will be even worse,” Bank of England Governor Andrew Bailey told reporters.
Higher rates increase the amount borrowers pay on everything from home mortgages to credit card purchases, reducing spending and slowing price increases. Lower rates tend to encourage spending and increase economic growth.
The Bank of England said it expects inflation to peak at around 7.25% in April. Based on this assumption, investors are betting that the bank will raise its key rate to 1.5% by mid-2023.
The bank adjusts interest rates trying to keep the inflation rate below 2% while promoting economic growth.
Meanwhile, the bank said it would gradually begin to reduce its holdings of UK government bonds and corporate debt held by financial institutions, initially by not reinvesting the money it receives from bonds arriving due.
He started these purchases in 2009 to inject cash into the economy during the global financial crisis. Policymakers were forced to turn to asset purchases after cutting interest rates to 0.5%, limiting their ability to use interest rates to boost economic growth.
As rates remained near all-time lows, the bank continued to buy bonds during the shocks caused by Departure of Great Britain from the European Union and the pandemic. He is now Britain’s biggest public debt holder, holding 875 billion pounds ($1.19 trillion) of government bonds, known as gilts.
Sales of government bonds will not begin until the discount rate has reached 1%. But the monetary policy committee said the bank is expected to start selling its £20bn stock of corporate bonds, until the end of next year.
Some analysts suggest that financial markets should be able to absorb bond sales as long as the central bank acts slowly.
But Russell Silbertson, strategist at investment firm Ninety One, sounded a note of caution. The only central bank to embark on such a policy was the Federal Reserve in 2018-19, and it was forced to back down, he said.
“The bank’s decision to begin the process of reducing its balance sheet…is a step into the unknown,” Silbertson said. “The bank’s actions therefore deserve special attention.”
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