Bank of England raises interest rates to fight inflation

Bank of England raises interest rates to deal with inflation

The Bank of England will raise interest rates in an attempt to combat soaring inflation, even as the Omicron variant of Covid-19 threatens to bring the economy to a standstill.

Outside the Royal Exchange and the Bank of England in London. Photo: AFP

The Bank of England’s (BoE) monetary policy committee said on December 16 that it would raise interest rates from a record low of 0.1% to 0.25%. This is the first move that the central bank of a major economy has made since the Covid-19 pandemic appeared.

The UK’s consumer price index (CPI) in November rose to 5.1%, the highest level in more than a decade, putting the economy at risk of stagnation. Inflation in economics is defined as a phenomenon in which the economy stagnates, growth slows down but inflation and unemployment rates remain high.

According to an assessment of business activity in the UK published on December 16, December is considered the weakest month for the economy since February.

The Bank of England forecasts that commodity prices will continue to rise. “Bankers expect inflation to remain at 5% for most of the winter period and peak around 6% in April 2022,” the Bank of England said. The agency cites rising energy costs and wages as the main factors pushing inflation higher next year.

Previously, economists and investors had been expecting the Bank of England to raise interest rates in November 2021 to deal with high inflation. But, what happened in reality disappointed them.

Higher official interest rates will increase borrowing costs for businesses and households, but encourage people to save more, which in turn reduces demand and inflation. On the other hand, raising interest rates can help relieve some of the heat of the UK economy today.

Because inflation in the UK has increased up 5.1%, 2.5 times higher than the Bank of England’s 2% target, inflation concerns overshadowed concerns about the impact of the Omicron variant on the economy.

“While the Omicron variant is likely to affect activities in the short-term, its impact on medium-term inflationary pressures is not clear at this stage,” the Bank of England said.

According to Mr. Holger Schmieding, economist at investment bank Berenberg (Germany), job Brother interest rate hike It can take up to a year and a half to have an impact on inflation. By then, any economic damage caused by Omicron will also cease.

“Delaying a rate hike amid growing uncertainty, as most experts predicted, is understandable. But it doesn’t really make sense. Inflationary pressures have increased and projected The forecast will linger in the UK, largely due to labor shortages and investment shortages over the past five years since the 2016 Brexit referendum,” said Holger Schmieding.

The world’s most influential central banks have fended off the Covid-19 pandemic with massive economic stimulus packages. But each bank’s approach is different. Typically, the US Federal Reserve (Fed) has just signaled about 3 interest rate hikes in 2022, while the European Central Bank (ECB) still maintains its loose monetary policy.

Instead of assessing that inflation is temporary, Fed Chairman Jerome Powell on December 15 acknowledged that pandemic-era inflation is at risk of lasting longer than initially expected.

The Fed also announced on December 15 that, starting January 1, 2022, the Fed will cut its monthly purchases of Treasuries by $20 billion and monthly purchases of mortgage-backed securities by $10 billion. Thus, the Fed will shrink the size of the pandemic economic stimulus package to $ 40 billion for Treasury bonds and $ 20 billion for mortgage-backed securities per month.

Explaining this move, Mr. Powell said the Fed has put itself in a state of anti-inflation. The Fed chairman also affirmed that the agency is not outside the fight against inflation. The Fed adjusted its policy as soon as it became clear that prices would continue to rise.

Meanwhile, the European Central Bank on December 16 kept interest rates steady and cut its growth forecast for the euro area in 2022. The European Central Bank said that it will end asset purchases under its 1.850 billion euro ($2.1 trillion) pandemic stimulus program by March 2022, but will increase its bond purchases under a separate program.

The European Central Bank will halve the average 92 billion euros ($104 billion) it pumps into the economy every month in April 2022, according to economic research firm Capital Economics. The European Central Bank has yet to raise interest rates, although it forecasts inflation could average 3.2% in 2022, well above its 2% target.

“Economic activity was moderate in the last quarter of this year and slower growth could extend into early next year,” European Central Bank President Christine Lagarde told reporters.