Bank of England Hikes Interest Rates by 8 Basis Points in Response to COVID-19 Pandemic

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The Bank of England (BoE) increased interest rates by 8 basis points to 12% after COVID-19 spread throughout the country, with its impact being even more severe than originally feared. The BoE also announced plans to raise interest rates by another 50 basis points within the next month in response to the financial crisis caused by COVID-19 outbreaks, on top of this week’s hike. For the first time in its 300-year history, the central bank said it would resort to injecting cash directly into UK businesses if necessary.

ENGLAND — On Thursday, the Bank of England decided to hike its base rate from 1.75% to 2.25%, which was less than the 0.75 percentage point increase that many traders had anticipated.

Although it decreased marginally in August, the UK’s inflation rate remained significantly over the bank’s 2% objective at 9.9% year over year. The largest price increases have been in energy and food, but core inflation, which excludes these items, is still 6.3% annually.

ENGLAND — On Thursday, the Bank of England decided to hike its base rate from 1.75% to 2.25%, which was less than the 0.75 percentage point increase that many traders had anticipated.

Although it decreased marginally in August, the UK’s inflation rate remained significantly over the bank’s 2% objective at 9.9% year over year. The largest price increases have been in energy and food, but core inflation, which excludes these items, is still 6.3% annually.

The British Chambers of Commerce and a number of analysts have previously predicted that the UK will experience a recession before the year is out. In addition to energy price shocks, it also deals with Brexit and COVID-19-related trade constraints, deteriorating consumer confidence, and decreased retail sales.

At the start of the coronavirus pandemic, the BOE lowered its benchmark interest rate, referred to as the bank rate, to 0.1% in March 2020 in an effort to support expenditure and growth. However, it was one of the first major central banks to begin a raising cycle at its December meeting when inflation started to soar dramatically late last year.

Seventh consecutive rise
U.K. interest rates have increased for seven straight months, reaching a level last seen in 2008.

The bank recognised the unpredictability of wholesale gas prices in a statement outlining its choice, but claimed that government declarations of curbs on energy costs would prevent future increases in consumer price index inflation. But it said that there has been more evidence of “continued strength in domestically produced inflation” since August.

“The labour market remains tight, and domestic cost and pricing pressures are still high,” it continued. While the [energy bill subsidy] lowers inflation in the near term, it also means that throughout the first two years of the projection period, consumer expenditure is likely to be less weak than anticipated.

In its Monetary Policy Committee decision, five members supported the 0.5 percentage point hike, while three members supported the greater 0.75 percentage point increase that was widely anticipated. For an increase of 0.25 percentage points, one member voted.

The bank claimed that it was not following a “pre-set route” and that it would keep evaluating data in order to determine the size, amount, and timing of upcoming increases to the bank rate. Shortly after the meeting, the committee also decided to start selling UK government bonds that were kept in its asset acquisition facility and highlighted a “sharp rise in government bond rates internationally.”

The bank’s decision is made in the context of a declining British pound, recession predictions, the European energy crisis, and a slate of new economic policies that incoming Prime Minister Liz Truss plans to roll out.

This week, the value of the pound against the dollar hit new multi-decade lows, trading below $1.14 through Wednesday and falling under $1.13 early on Thursday. It was last at this level in 1985 until it fell sharply against the dollar this year. After the BOE ruling, it increased by 0.2% with the 0.5 percentage point increase completely included in.

The pound has declined in value as a result of both the dollar’s strength (traders are moving to the perceived safe haven investment during market turbulence and as the U.S. Federal Reserve raises its own interest rates) and gloomy economic predictions for the UK.

Mini-budget Friday
The nation’s newly elected administration, meantime, has outlined a number of key economic policy suggestions this month in advance of a “fiscal event,” known as a mini-budget, when they will be formally unveiled on Friday.

This is anticipated to include a proposal for “investment zones” with cheap taxes, a reversal of the recent increase in the National Insurance levy, and reductions in levies for enterprises and homeowners.

Truss has emphasised several times his dedication to reducing taxes in an effort to spur economic expansion.

The government has still unveiled a significant investment plan in response to the energy crisis in an effort to lower businesses’ and consumers’ increasing energy costs.

Data released on Wednesday revealed that the U.K. government borrowed £11.8 billion ($13.3 billion) last month, which was £6.5 billion more than the same month in 2019 and nearly twice as much as projected.

In order to use the harsh instrument of rate increases to contain inflation, the bank had to perform a “tricky balancing act,” according to David Bharier, head of research at business association the British Chambers of Commerce.

In a letter, he stated that the bank’s move to hike rates would “dampen consumer confidence” by increasing the danger for people and organisations who are vulnerable to debt loads and growing housing expenses.

Recent pronouncements about energy price caps “will have given companies and individuals alike some reassurance and should put downward pressure on the pace of inflation.”

He continued, stating that the next economic statement from the finance minister on Friday was a “critical moment” because “the bank, aiming to reduce consumer demand, and government, looking to stimulate GDP, might now be pushing in different ways.”

The bank was raising rates at a “reasonable pace,” said to Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, given the prospect for lower inflation and the emergence of economic slack.

At the bank’s November meeting, Tombs predicted a 50 basis point rise, however the hawkishness of three committee members raised the possibility of a 75 basis point increase. He predicted that a 25 basis point increase in December would come after this, raising the bank rate to 3% by the end of the year and ending the likelihood of increases the following year.

The UK is not the only country that has increased interest rates to fight inflation. While Switzerland’s central bank increased rates by 75 basis points on Thursday morning, the European Central Bank increased rates by 75 basis points earlier this month. The benchmark rate range was raised by the same amount by the US Federal Reserve on Wednesday.

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