April 14, 2024 4:35 pm
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Bank of England Takes Drastic Measures in Response to Stubborn Inflation Levels with a Half-Point Rate Hike

Bank of England Raises Key Interest Rate to Tackle Inflation

The Bank of England (BoE) has lifted its key interest rate by a half-point to 5% to combat the UK’s stubbornly high inflation levels, despite this move worsening the cost-of-living crisis. The higher-than-expected increase to a 15-year high marks the 13th consecutive rise in interest rates.

The BoE explained their decision: “There had been significant upside news in recent data that indicated more persistence in the inflation process”. The latest data shows UK annual inflation remained at 8.7%, defying expectations of a slowdown. Currently, the UK inflation rate is the highest among G7 rich nations.

Markets had anticipated a smaller quarter-point increase before the decision. However, the half-point hike was in stark contrast to the Federal Reserve’s pause on US rate hikes after a sharp easing in the country’s inflation last week. Additionally, whilst the European Central Bank raised its borrowing costs by a quarter point last week, the Swiss and Norwegian central banks have hiked their rates yesterday.

British Prime Minister Rishi Sunak has made it a priority to reduce the pace of price rises for the Conservative government heading into the general election next year. Traders predict UK interest rates will reach 6% by the end of this year and, according to analysts, might push Britain into a recession. Sunak wants inflation reduced to 5% by the end of the year, which is approximately half the level of inflation at the start of 2023.

The BoE began raising its key interest rate from a record low of 0.1% at the end of 2021 due to inflation creeping up as economies slowly emerge from COVID-19 lockdowns. It peaked in October 2022 at 11.1% on rampant energy bills following Russia’s invasion of Ukraine. Moreover, core inflation, which strips out food and energy costs, spiked in May to the highest level in over three decades at 7.1%.

In response to the action taken by BoE, finance minister Jeremy Hunt defended the need for higher rates, even if they compounded the cost-of-living crunch. He stated that “Core inflation is higher in 14 EU countries, and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down”.

Commercial lenders usually match the central bank’s rate moves on their home loans, resulting in UK mortgage rates and rents surging. This is biting deep into disposable incomes while pay rises fail to keep pace with inflation. The BoE has acknowledged that the “full impact” of its 13 rate hikes “would not be felt for some time” in the mortgage market and policymakers “also recognised that it had become more important to consider developments in the rental market”.

Whilst the BoE’s hikes have affected the UK government’s long-term borrowing costs, those who can afford to save will benefit from increased fixed returns on investments. The central bank’s objective is to keep UK annual inflation close to a target of 2%. As a result, Thursday’s move brings its rate to the highest level since the 2008 financial crisis.

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