Bank of England Takes Decisive Action by Raising Interest Rates to Combat Inflation
Bank of England Raises Interest Rates to Highest Level in 15 Years
The Bank of England has raised interest rates for the twelfth consecutive time, bringing the UK’s interest rate to the highest in fifteen years. The central bank lifted its key interest rate a quarter of a percentage point to 4.5%, marking the first increase in 2018. The decision was made to deal with the stubbornly high inflation rate, which has remained in the double digits for a while now. However, the Bank of England also offered some good news by upgrading its economic forecast, removing recession predictions, and highlighting falling energy prices as contributing factors. Despite this, food prices remain elevated, and policymakers have warned that the slowdown in food inflation may be more gradual than expected.
Improved Economic Forecast
The improved economic forecast offers good news amid a more robust labor market. However, food prices remain elevated, and the UK is experiencing higher inflation than the United States and Western Europe. The central bank has predicted that by the end of the year, the headline rate of inflation, which includes food and energy prices, will likely fall to 5.1%. Data for the consumer price index for April, to be published later this month, is expected to show inflation beginning a more substantial slowdown as a surge in household energy bills will have washed out of annual inflation calculations. It’s important to note that household energy bills surged more than 50% after the war in Ukraine raised wholesale prices significantly.
Better-Than-Expected Growth
Despite this positive news for the UK, with better-than-expected growth, lower unemployment, and rising consumer confidence, it may be possible that some of the inflationary pressures will persist for longer than previously thought. The Bank of England had a particularly pessimistic view of the British economy but has since revealed the most significant upgrade to its economic forecast in its history, thanks to lower wholesale energy prices and government stimulus. The upgraded outlook, however, is expected to offer only limited comfort to households and businesses. As a result, the forecast for growth is weak, with the economy expected to grow about a quarter percent this year, according to the bank’s projections.
Related Facts
- After the latest interest rate hike, some banks passed the cost to household borrowers. HSBC and the Nationwide Building Society passed on the increase almost instantly, with other banks expected to follow suit.
- ACCORDING TO A LEAKED REPORT, the EU is projecting an economic growth rate of 2.3% for the UK in 2021 after it leaves the European Union,
- While the latest interest rate hike was expected, it increases the cost of mortgages and borrowing and is likely to dampen consumer confidence across the UK.
Key Takeaway
The UK’s central bank has raised interest rates to the highest level in fifteen years, marking the twelfth consecutive increase. This has been done to help deal with the stubbornly high inflation rate, which remains in the double digits. However, while the Bank of England has upgraded its economic forecasts for the British economy, the outlook is still fragile. Despite lower unemployment and rising consumer confidence, households and businesses are not expected to feel much relief from the upgrades.
Conclusion
The Bank of England’s latest move sends a strong message to the markets that it stays committed to helping the UK control its stubbornly high inflation rate. This decision could considerably impact UK households and businesses, as it will increase the cost of borrowing and mortgages. While the UK is poised to experience growth later in the year, the central bank’s projections indicate slow growth, meaning that households and businesses may not see any significant relief from these upgrades for a while yet.
