London, March 23 (BNA): The Bank of England focused on fighting inflation, announcing its 11th consecutive interest rate hike on Thursday, despite concerns about the economic repercussions resulting from the turmoil in the global financial system.
Britain’s central bank boosted its key interest rate by a quarter of a percentage point to 4.25%, a day after the US Federal Reserve approved a similar move to tame inflation that is crimping household balance sheets and slowing economic growth, the Associated Press reports.
The bank’s monetary policy committee’s decision came after Britain’s statistics agency surprised policymakers on Wednesday by reporting that inflation accelerated to 10.4% in February, driven by the cost of food, clothing and dining out.
Before the figures were released, many analysts expected the Bank of England to keep interest rates unchanged after the collapse of two US banks and ensuing troubles at Swiss bank Credit Suisse, which forced rival UBS to hastily arrange takeovers.
In announcing its decision, the bank said that the bank “will continue to closely monitor indicators of continued inflationary pressures.” “If there is evidence of more sustained pressures, further tightening of monetary policy will be required.”
However, Thursday’s move was the smallest rate hike since May 2022 as the Bank of England expects a sharp drop in inflation later this year. Inflation is expected to slow to 2.9% by the end of the year with lower energy costs and the large price increases recorded last year out of the calculation.
Raising interest rates increases the cost of borrowing, which reduces spending and relieves upward pressure on prices. But it also tends to slow economic growth.
Central bankers around the world are struggling to balance competing economic demands as they try to rein in inflation, which is eroding savings and raising costs for consumers and businesses, without unnecessarily hurting economies weakened by the COVID-19 pandemic and Russia’s war in Ukraine.
In the aftermath of the collapse of the Silicon Valley bank in California and its ripples on the global financial system, policymakers are also worried that banks around the world may cut back on lending, further impeding economic growth.
The Federal Reserve raised its key interest rate by a quarter point on Wednesday as Chairman Jerome Powell tried to reassure Americans that it was safe to leave money in their banks.
The Swiss Central Bank raised its key interest rate by half a point on Thursday and announced that the government’s takeover of Credit Suisse by Swiss bank UBS “stopped the crisis”.
A week ago, the European Central Bank raised interest rates by a significant half point, ignoring the concerns of the financial market, and called for flexibility in the European banking sector.
The economic situation is more complex in Britain, where a high level of dependence on natural gas and limited storage capacity left energy users particularly vulnerable to rising global gas prices after Russia’s invasion of Ukraine.
The gas crisis took an unexpectedly heavy toll in February, when rising energy prices for heating greenhouses, combined with bad weather in southern Europe and Africa, led to shortages of fresh vegetables such as peppers, cucumbers and spinach.
This contributed to an 18% increase in food prices, the largest increase in 45 years.
Britain is also still adjusting to the impact of leaving the European Union, which has reduced trade with its neighbours, slashed the supply of cheap labor and slowed economic growth.
The Bank of England and the government have focused on trying to prevent these cost pressures from becoming embedded in the economy, driving up wages and increasing inflation.
“We’ve gone from a situation where there was at least some degree of clarity from central banks to one where they had to second-guess themselves,” Ross Mold, director of research at UK investment platform AJ Bell, said ahead of the price. The decision has been announced.
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