The Bank of England raises rates again in a bid to corral inflation.
The Bank of England raised interest rates to their prepandemic level on Thursday in an effort to combat rapidly accelerating inflation that has been worsened by the war in Ukraine.
The central bank raised rates by 25 basis points to 0.75 percent, the third consecutive increase at a policy meeting, as it lifted its forecasts for inflation. But the decision wasn’t unanimous as policymakers weighed the gloomier outlook for the British economy.
While the war has led to higher energy and commodity prices, pushing up the expected peak in inflation, it is also predicted to cut economic growth in Europe, including Britain. This creates a challenge for the bank. Its goal is to bring inflation back down to its 2 percent target, but policymakers will want to avoid cooling the economy too aggressively and knocking the postpandemic recovery off course.
“The global economy outlook had deteriorated significantly following Russia’s invasion of Ukraine in late February, and the associated material increase in the prices of energy and raw material,” the bank said in a statement.
On Wednesday, the Federal Reserve raised U.S. interest rates for the first time since 2018 and projected six more increases this year as inflation soars. Last week, the European Central Bank moved closer to raising its benchmark interest rate when it proposed an end date for its bond-buying program.
“The economy has recently been subject to a succession of very large shocks,” the Bank of England said on Thursday. “Russia’s invasion of Ukraine is another such shock.” If energy and commodity prices stay high it will weigh on Britain’s economy. “This is something monetary policy is unable to prevent,” the bank added.
The bank’s remit is to target an inflation rate of 2 percent, and another interest rate increase was needed to stop higher trends in pay and consumer prices from becoming entrenched, it said.
The annual rate of inflation rose to 5.5 percent in January and is projected to rise to about 8 percent in the second quarter, the bank said. The bank had previously expected inflation to peak in April when energy bills rise, but it now says inflation could be even higher later this year, possibly several percentage points higher.
Even as inflation gets further away from target, the future pace of interest rate increases is less clear. The central bank reiterated that “some further modest tightening” in monetary policy might be appropriate but added a caveat on Thursday, saying there are risks to this judgment depending on path of inflation.
Before the war, there were already concerns in Britain about a cost-of-living crisis. Inflation was outpacing wage growth, energy bills were set to jump higher and tax increases are scheduled for next month. The government is under increasing pressure to reconsider its plans to raise taxes when it announces an update to the budget next week.
The Russia-Ukraine War and the Global Economy
Russia’s invasion of Ukraine is “likely to accentuate both the peak in inflation and the adverse impact” on economic growth by “intensifying the squeeze on household incomes,” the central bank said on Thursday.
In February, the bank projected that its measure of households’ net income after taxes and inflation would shrink 2 percent this year from last year. The impact on incomes is “now likely to be materially larger” than this because of higher commodity prices, the bank said on Thursday.
Eight of the nine members voted for the rate increase. Jon Cunliffe, a deputy governor for financial stability, voted to hold interest rates at 0.5 percent because of the “very material negative impacts” on households from higher commodity prices. A broader assessment on this balance between higher inflationary pressures and the worsening outlook for household budgets was needed, he said, according to the minutes of this week’s policy meeting.