Tag: hike

The size of the bank’s 13th hike in a row was a surprise after most economists had predicted a smaller quarter-point increase…reports Asian Lite News

Fears that the British economy is heading for recession have mounted sharply after the Bank of England raised borrowing costs by more than anticipated, seeking to combat stubbornly high inflation with a hike that will hit borrowers hard, particularly homeowners who have to refinance in the coming months.

On a busy day for central bank action in Europe, the Bank of England said on Thursday that its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a new 15-year high of 5 percent. All but two members of the panel backed the half-point increase.

The size of the bank’s 13th hike in a row was a surprise after most economists had predicted a smaller quarter-point increase. Some even called it a panic move, given that there had been hopes as recently as last month that the bank would pause its rate-hiking cycle.

Financial markets are pricing in a potential rate peak of 6 percent, a level not hit since early 2000, after Governor Andrew Bailey warned of further increases if inflation fails to show clear signs of slowing.

“We are committed to returning inflation to the 2 percent target and will make the decisions necessary to achieve that,” he said.

Clearly, the bank has been spooked by inflation failing to ease as fast as predicted from October’s peak of 11.1 percent. Figures on Wednesday showed UK inflation unexpectedly holding steady at 8.7 percent.

Inflation has proven stickier in the UK than in other major economies with many blaming the bank’s slow start at raising borrowing rates and Britain’s departure from the European Union, which has added to import costs.

With wages rising fast, it is increasingly clear that high inflation has become embedded in the economy.

“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them,” Bailey said. “But if we don’t raise rates now, it could be worse later.”

Across Europe, other central banks also decided to push up borrowing costs on Thursday, including the Swiss National Bank with a quarter-point hike and Norway with a half-point increase. Turkey nearly doubled its benchmark rate in a signal of a shift from unorthodox economic policies.

Banks around the world, from the US Federal Reserve to the European Central Bank, have rapidly raised interest rates over the past couple of years to bring down inflation first stoked by supply chain backups tied to the rebound from the pandemic and then Russia’s invasion of Ukraine, which caused energy and food costs to surge.

The Fed decided last week to keep rates unchanged but indicated the possibility of more hikes this year.

Higher interest rates help lower inflation by making it more expensive for individuals and businesses to borrow, meaning they potentially spend less, reducing demand and pressure on prices.

The UK rate hike will pile further pressure on borrowers, particularly the 1.4 million or so households that will have to refinance their mortgages over the rest of the year. Those on variable mortgages, which track the bank’s base rate, will face an imminent increase in their repayments. Renters, too, are facing increases.

“The rise in interest rates to 5 percent will push millions of households with mortgages towards the brink of insolvency,” warned Max Mosley, an economist at the National Institute for Economic and Social Research.

The increases will clearly come at a cost, and there are concerns over the outlook for the British economy, which has so far avoided falling into recession even as Europe’s economy contracted slightly in the six months ending in March.

“It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down,” said Luke Bartholomew, senior economist at asset management firm Abrdn. “And today’s large rate increase will probably be seen in retrospect as an important milestone towards that recession.”

In a recession, unemployment would inevitably increase, and home repossessions would become more prevalent — hardly the backdrop the Conservative government wants ahead of a likely general election next year. It is trailing the main opposition Labour Party in the polls.

Prime Minister Rishi Sunak, who has made halving inflation this year to about 5 percent his main priority, said he understood the “anxiety” people are feeling.

“I’m here to tell you that I am totally, 100 percent on it, and it’s going to be OK, and we are going to get through this,” he told workers at a warehouse in Dartford, just east of London.

Not everyone is convinced the bank is doing the right thing, arguing that previous interest rate increases have yet to work their way through the economy. There’s always a lag.

“Pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes,” said Paul Nowak, general secretary of the umbrella Trades Union Congress.

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The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008…reports Asian Lite News

The Bank of England hiked interest rates by a quarter of a percentage point Thursday, extending its long-running fight to rein in prices after a surprise increase in inflation in February.

The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008. Like other major central banks, it has pushed ahead with raising rates despite recent turmoil in the banking sector.

The Bank of England said in a statement that since its last meeting in February, inflation “had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected previously.”

Employment growth had also been more robust than anticipated and household disposable income was now expected to remain flat in the near term — rather than falling significantly — after the government extended its support for energy bills, the bank added.

It said that it would raise rates further “if there were to be evidence of more persistent [price] pressures.”

UK consumer prices surged by 10.4% in February compared with a year ago, the first rise in inflation in four months, as food prices soared and the cost of visiting restaurants and hotels increased. The Office for National Statistics noted particular price rises for some salad and vegetable items, partly caused by shortages, which led to rationing by supermarkets.

In a letter Thursday to finance minister Jeremy Hunt, Bank of England governor Andrew Bailey said inflation had “increasingly been driven also by factors that are more domestic,” in particular labor shortages.

However, wage growth, which remains below inflation, was expected to fall back “more quickly” than projected in February, Bailey added.

The Office for Budget Responsibility, the government’s fiscal watchdog, expects inflation to fall rapidly, reaching around 3% in the final quarter of this year, helped by falling energy prices and further easing of supply bottlenecks. The Bank of England targets an inflation rate of 2%.

The turmoil in the banking sector has increased uncertainty over the inflation outlook, because banks are now widely expected to tighten lending criteria, which would weigh on consumer demand and business investment, and so alleviate price pressures.

The Bank of England said it would “continue to monitor closely” any effects from the banking crisis on credit conditions faced by households and firms. It added that the UK banking system “remains resilient.”

The Bank of England’s job is made even more complicated by the fact that the UK economy is expected to shrink this year.

People out and about in the rain along the market area on Watney Street in Shadwell on 8th March 2023 in London, United Kingdom.

The British Chambers of Commerce said Thursday’s hike, while necessary to fight inflation, would pile further pressure on small businesses, which are facing a double-whammy from rising prices and rising borrowing costs.

“The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade,” said David Bharier, head of research at the business group.

Some economists said the central bank might even be mulling rate cuts by the end of the year.

“With a flagging economy and lower energy costs still set to drive a significant fall in inflation this year, despite February’s surprise increase, the case for cutting interest rates is only likely to grow,” commented Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

The Bank of England has now raised interest rates at each of its rate-setting meetings since December 2021.

The European Central Bank, the US Federal Reserve and the Swiss National Bank have also raised interest rates in the past week.

Luke Bartholomew, senior economist at the U.K.-based fund manager abrdn, said he expects Thursday’s move to be the last rate increase of this cycle because the impact of past hikes and recent market volatility will begin to slow economic growth.

“However, there is still a significant risk of one final rate increase if inflation proves to be a bit stickier in coming months,” he said.

The Bank of England will have to make that decision in an even more complex environment than other central bankers.

A high level of dependence on natural gas and limited storage capacity left British energy users particularly exposed to the surge in global gas prices following Russia’s invasion of Ukraine. Britain also is still adjusting to the impact of leaving the European Union, which reduced trade with its neighbors, curtailed the supply of cheap labor and slowed economic growth.

Treasury chief Jeremy Hunt applauded the central bank’s decision.

“With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone,” he said.

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