Business

Bank of England Raises Interest Rates by Another Half a Point

As Britain goes through a period of vast change, with a new government and new monarch, the central bank is continuing its efforts to stop high inflation becoming embedded in the economy with a steady, predictable increase in interest rates.

The Bank of England raised its key rate by another half a percentage point on Thursday, to 2.25 percent, taking it to the highest level since late 2008, but disappointing some who thought it would have made a three-quarter-point move. In Britain, consumer prices rose 9.9 percent in August from a year earlier, slowing slightly from the previous month but still near the fastest pace of inflation in four decades, as energy and food prices climbed higher.

Policymakers also voted to start selling the bank’s holdings of British government bonds back to the market, entering uncharted territory after more than a decade of growing its balance sheet to provide easy money to lenders.

The changes coming to Britain include a new government freezing energy bills and planning to cut tax to lessen the pain of the higher cost of living. Meanwhile, the pound has fallen to its weakest level against the dollar since 1985 as investors question the country’s economic outlook and fiscal policy, and a recession seems inevitable despite a tight labor market. The Bank of England forecast that the economy will contract slightly in third quarter, following a drop in the second quarter, which is widely considered to be a recession.

The state of flux that the British economy is in was evident in a rare three-way split among the Bank of England’s nine-person rate-setting committee. Five policymakers voted to increase rates by half a point, the same move as the previous meeting; three wanted an more aggressive increase of three-quarters of a point; and one person voted for just a quarter-point increase, arguing that economic activity was already weakening and future inflation risks were waning.

Since the bank’s last policy meeting in August, major changes to government policy have altered the outlook for inflation. This month, a new government, led by Prime Minister Liz Truss, took over. Amid concerns about the ruinous impact of rising energy costs for households and businesses, the government has moved to cap bills for both. The immediate effect is that inflation is expected to peak sooner and at a much lower rate.

The Bank of England said it expected the annual inflation rate to peak at just under 11 percent next month. The freeze on household energy bills has lowered its forecast for the peak in inflation by about five percentage points. Still, the bank expected inflation to rise above 10 percent over the next few months before it starts to retreat.

But the government’s expansive energy policies and its broader fiscal plans, which include a package of tax cuts and hopes of quickly increasing economic growth, have the potential to raise longer-term inflationary pressures. Formal announcements on taxes aren’t expected from the Treasury until Friday and the Bank of England said it would make a full assessment of the impact for the November policy decision.

“Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary,” according to the minutes of the bank’s policy meeting. The bank’s meeting was delayed a week by the mourning period for Queen Elizabeth II.

Since December, the Bank of England has raised rates seven times, starting from a record low of 0.1 percent. Other major central banks started raising rates later but have since moved in larger increments. On Wednesday, the Federal Reserve raised its key rate by three-quarters of a point, moving it to a range of 3 to 3.25 percent. Six months ago, rates in the United States were near zero. The European Central Bank’s past two rate increases were the fastest change in rates in the bank’s history. And earlier on Thursday, Switzerland’s central bank raised its rate by three-quarters of a point, ending its long era of negative interest rates, in place since 2015.

Back to top button