LONDON — The Bank of England has announced its biggest interest rate hike in three decades as it tries to fend off stubbornly high inflation fueled by Russia’s invasion of Ukraine and Israel’s disastrous economic policies. former Prime Minister Liz Truss.
The central bank raised its benchmark rate by three-quarters of a percentage point to 3% on Thursday after consumer price inflation fell to a 40-year high in September. The aggressive move was expected after a more cautious half-point rise six weeks ago.
The interest rate decision is the first since the Truss government announced £45bn ($52bn) in unfunded tax cuts that sparked financial market turmoil, pushed up costs mortgages and forced Truss out of office after just six weeks. His successor, Rishi Sunak, has warned against spending cuts and tax increases as he seeks to undo the damage and show Britain is committed to paying its bills.
The bank’s “latest projections described a very difficult outlook for the UK economy. It was expected to be in recession for an extended period and CPI inflation would remain high at over 10% in the short term,” according to the minutes of the meeting.
The rate hike is the Bank of England’s eighth consecutive and largest since 1992. It comes after the US Federal Reserve on Wednesday announced a fourth straight three-quarter point jump as central banks around the world combat inflation which erodes living standards and slows the economy. growth.
Central banks have struggled to contain inflation after initially believing price rises were fueled by international factors beyond their control. Their reaction intensified in recent months when it became clear that inflation was taking root in the economy, translating into higher borrowing costs and higher wage demands.
The war in Ukraine has driven up food and energy prices around the world as shipments of natural gas, grain and cooking oil have been halted. This came on top of inflation which started to pick up last year as the global economy began to recover from the COVID-19 pandemic.
Europe has been particularly hard hit by soaring natural gas prices as Russia has responded to Western sanctions and support for Ukraine by cutting shipments of fuel used to heat homes, generate electricity and electricity. he electricity industry and European nations have competed for alternative supplies on world markets.
The UK also struggled, with wholesale gas prices quintupling in the 12 months to August. While prices have fallen more than 50% since the August peak, they are expected to rise again during the winter heating season, worsening inflation.
The British government has sought to protect consumers with a cap on energy prices. But after the turmoil caused by Truss’ economic policies, Treasury chief Jeremy Hunt limited the price cap to six months instead of two years, ending on March 31.
Meanwhile, food prices jumped 14.6% in the year to September, driven by soaring prices for staples such as meat, bread, milk and eggs , said the Office for National Statistics. This brought consumer price inflation down to 10.1%, the highest level since early 1982 and equal to the level last seen in July.
The rising cost of tea bags, milk and sugar means that even the “humble” cup of tea, which people across the country turn to when they need a break from the pressures of everyday life, is becoming more and more expensive, according to the British Retail Consortium said on Wednesday.
“While some supply chain costs are starting to come down, this is more than offset by the cost of energy, which means a tough time ahead for retailers and households,” said Helen Dickinson, director general of the consortium.
The failure of Truss’ economic plan has made matters worse, pushing the pound to a record high against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England will raise interest rates higher than expected. This increased mortgage costs as lenders reviewed their products.
The economic turmoil is making home ownership even more out of reach for many young people, according to research released this week by Hamptons, a UK property agency.
Mortgage rates are averaging around 6.5%, down from 2% a year ago.
This means the average first-time home buyer would need to put down a down payment equal to 41% of the purchase price to keep their monthly repayments at the same level as a similar buyer who made a 10% down payment last year. , Hamptons said.