Bank of England Raises Interest Rates to 2.25%
As Britain goes through a period of vast change, with a new government and new monarch, the central bank is continuing its efforts to stop high inflation becoming embedded in the economy with a steady, predictable rate increase.
The Bank of England raised its key interest rate by another half a percentage point on Thursday, to 2.25 percent, taking the rate to the highest level since late 2008, but disappointing some who thought it would have made a move of three-quarters of a point. In Britain, consumer prices rose 9.9 percent in August from a year earlier, slowing slightly from the previous month, but still near the fastest pace of inflation in four decades, as energy and food prices climbed higher.
Policymakers also voted to start selling the bank’s stock of British government bonds back to the market, entering uncharted territory after more than a decade of growing its balance sheet to provide easy money to lenders.
A new government is freezing energy bills and planning tax cuts to lessen the pain of the higher cost of living. The pound has fallen to its weakest level since 1985 as investors question the country’s economic outlook, and a recession seems inevitable despite a tight labor market. The bank forecast that the economy will contract slightly in third quarter, following a drop in the second quarter, which is widely considered to be a recession.
The state of flux that the British economy is in was evident in a rare three-way split among the Bank of England’s nine-person rate-setting committee. Five policymakers voted to increase rates by half a point, the same size move as the previous meeting; three wanted an even more aggressive increase of three-quarters of a point; and one person argued that economic activity was already weakening and future inflation risks were waning and voted for just a quarter-point increase.
Since the bank’s last policy meeting in August, there have been major changes to government policy altering the outlook for inflation. This month, a new government, led by Prime Minister Liz Truss, took over. Amid concerns about the ruinous impact of rising energy costs for households and businesses the government has moved to cap bills for both. The immediate effect is that inflation is expected to peak sooner and at a much lower rate.
The bank said it expected the annual inflation rate to peak at just under 11 percent next month. The freeze on household energy bills has lowered the peak in inflation by about five percentage points. Still, the bank forecasts inflation will be above 10 percent over the next few months before it starts to retreat.
The bank’s meeting was delayed a week by the mourning period for Queen Elizabeth II.