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British central bank raises key interest rate significantly


In autumn, inflation in Great Britain is likely to exceed the ten percent mark. The central bank reacted by raising the key interest rate by 0.5 percentage points – the biggest step in almost three decades.

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Customers in a supermarket in London (2021): »It may not be as bad as in Turkey

Photo: Aaron Chown / dpa

In view of the high inflation, the British central bank is driving interest rates up.

She set it at 1.75 percent on Thursday.

That was a 0.5 percentage point increase and the Bank of England's biggest move in 27 years.

The financial markets were prepared that she would follow the lead of the European Central Bank (ECB).

This recently initiated its turnaround in interest rates with such a large step.

Although the monetary watchdogs in London completed their monetary policy turnaround in December 2021, they have only taken small steps so far.

Despite a recession looming this year, according to BoE boss Andrew Bailey, they have now decided with a clear majority of eight votes to one in the Monetary Policy Committee for a strong hike.

The central bankers were under considerable pressure to act.

Driven by soaring energy costs and supply chain problems, consumer prices on the island have recently skyrocketed.

"In view of the current inflation rate of 9.4 percent and the prospect that inflation will jump above the ten percent mark in autumn due to the foreseeable price increases by British energy suppliers, the Bank of England had hardly any other option," according to the assessment of LBBW economist Dirk Chlench.

According to the BoE, the surge in inflation in the former EU country should reach its peak in October with a value of 13.3 percent.

At the same time, the central bank expects the economy to slide into a recession at the end of the year, which is likely to last for the whole of next year.

This would be the longest period of weakness on the island since the global financial crisis.

According to the BoE's projection, this economic downturn should curb demand to such an extent that inflation can return to the central bank's target value of two percent within two years.

Bailey emphasized that the central bank stands by the primacy of price stability “without ifs and buts”, even if the economic situation poses challenges for monetary policy.

The pound fell to an intraday low of $1.2102 from $1.2181 after the Bank of England interest rate decision.

BoE observer Samuel Fuller from Financial Markets Online sees economic bleak times ahead for the UK: »It may not be as bad as in Turkey, where the inflation rate is reaching 80 percent.

But that will be cold consolation as energy shortages push the UK into dark and uncomfortable climes in the new year.

Frankly, it's an economic time bomb and interest rates can only go one way."

Higher interest rates are intended to prevent inflation from taking root in the economy, which would cause wages and prices to keep rising.

Due to persistently high inflation in the United States, the US Federal Reserve has recently raised the key interest rate by 0.75 percentage points twice in a row.

»All options on the table«

The Bank of London reiterated that it can use force to break the wave of inflation if necessary.

The currency watchdogs did not show their cards about the next steps: "Monetary policy is not on a predetermined path." Bailey emphasized that "all options are on the table" for the September meeting and beyond.

At the same time, the monetary watchdogs signaled that they will soon start actively reducing their large holdings of government bonds - probably shortly after the next meeting, which is scheduled for mid-September.

It is said to be actively selling 10 billion pounds of paper per quarter.

Treasury holdings on the BoE's balance sheet peaked in December when the central bank stashed £875 billion worth of paper.

Since expiring paper has not been replaced since February, it now only holds bonds with a volume of £844 billion.


Source: spiegel

All business articles on 2022-08-04

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