Bank of England raises interest rates by biggest
hike in 30 years
The central bank said further increases might be in
order to bring down inflation.
BY HANNAH
BRENTON AND JOHANNA TREECK
NOVEMBER 3,
2022 1:49 PM
The Bank of
England today aggressively increased interest rates by the biggest amount since
1989 as the central bank wrestles with high inflation.
The Bank
said the U.K. economy was already in recession and forecast this will last longer
than any since comparable records began, albeit a shallower contraction than
previously expected. Although the economic picture has improved slightly since
incoming Prime Minister Rishi Sunak reversed his predecessor’s plan for
unfunded tax cuts, the U.K. economy is still performing worse than the U.S. and
the Eurozone.
The
decision to hike rates by 75 basis points aims to take some heat out of the
U.K. economy to try to tame uncomfortably high price pressures on households
and businesses. The bumper increase takes the base rate to 3 percent, the
highest level since 2008.
This marks
the largest increase in interest rates since 1989, except a short-lived episode
on Black Wednesday in 1992 when the UK government dropped out of the European
Exchange Rate Mechanism.
“If we
don’t take action to bring inflation down, it gets worse,” Andrew Bailey,
governor of the Bank of England, told journalists.
The BoE
said further hikes may be needed “for a sustainable return of inflation to
target, albeit to a peak lower than priced into financial markets” — but added
it will respond “forcefully, as necessary” if inflation stays high. The Bank’s
Monetary Policy Committee voted in favor of the increase by a majority of 7-2.
The pound
fell against the U.S. dollar to $1.12 at 1:30 p.m. London amid the Bank’s
efforts to rein in market expectations about the peak of interest rates.
The move is
in keeping with large hikes undertaken by the European Central Bank and U.S.
Federal Reserve as central banks battle to get inflation under control —
although the Fed hinted yesterday it could slow down the pace of its increases.
The U.K.
central bank this week also started to sell its stock of government bonds,
built up since the 2008 financial crisis, to tighten up the amount of money
pumped into the economy.
But like
other central banks, the BoE is juggling fears that rate hikes may weigh on
growth. The jump in the base rate will be painful for some U.K. homeowners due
to its knock-on impact on mortgage costs.
“The MPC’s
latest projections described a very challenging outlook for the U.K. economy.
It was expected to be in recession for a prolonged period and CPI inflation
would remain elevated at over 10 percent in the near term,” the Bank said in a
statement.
Threadneedle
Street predicted a dire outlook with a recession for two years and rising
unemployment.
Bailey said
it was “a tough road ahead” and acknowledged the difficulties facing
mortgage-holders.
“This is a
bigger shock than we saw in a year in the 1970s,” he said.
U.K.
political turmoil has made the BoE’s balancing act harder by bludgeoning public
finances. Former U.K. leader Liz Truss’ economic plans spooked investors and
created a black hole in U.K. public finances, partly because her policies were
seen as working against tightening monetary policy.
Still, the
BoE’s position was made easier after Sunak pledged to change course, but the
details of a program of tax rises and spending cuts to plug the hole in
government finances will only be unveiled on November 17.
Chancellor
Jeremy Hunt said inflation was “the enemy” in a statement responding to the
Bank’s rate hike. “The most important thing the British government can do right
now is to restore stability, sort out our public finances, and get debt falling
so that interest rate rises are kept as low as possible,” he said.
This
article has been updated.
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