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Bank of England lifts interest rates by 0.5 percentage points

The Bank of England raised interest rates by 0.5 percentage point to 2.25 percent on Thursday, signaling the prospect of a further large hike in November to bring inflation under control.

This move brings the BoE benchmark rate to its highest level since the onset of the global financial crisis in 2008. However, the nine-member Monetary Policy Committee has distanced itself from the even more aggressive approach of colleagues at the European Central Bank and the US Federal Bank. To reserve.

The Fed hiked 0.75 percentage point for the third time in a row this week.

Sterling reduced its gains against the US dollar for the day following the BoE’s rate hike, which was less than markets had expected. At around $1.13, sterling is still trading at its lowest level since 1985 against the US currency.

The MPC split in three ways, with the majority — including BoE Governor Andrew Bailey and chief economist Huw Pill — voting for the 0.5 percentage point move.

Three members — Jonathan Haskel, Catherine Mann and Deputy Governor Dave Ramsden — favored a larger increase of 0.75 percentage points, arguing that acting faster could help the BoE avoid “a more extensive and expensive tightening cycle later on.” .

Swati Dhingra, a newcomer to the committee, favored a more modest move of 0.25 percentage points as economic activity was already weakening.

Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said the BoE’s decision not to follow other central banks with a 0.75 percentage point increase “provided reassurance that it is focused on the inflation outlook.” of consumer prices and evidence of growing slack in the economy, rather than just randomly following the Joneses.”

The BoE now said it expects UK gross domestic product to fall 0.1 percent in the third quarter of the year, compared to its forecast of 0.4 percent in August. This would mark a second consecutive quarter of decline, reinforcing fears the economy is slipping into recession.

The MPC suggested it would wait until November when it updates its forecasts to better understand the effects of the new government’s fiscal policies. Chancellor Kwasi Kwarteng’s “growth plan,” announced Friday, would likely “provide further fiscal support” and “contain news relevant to the economic outlook,” it said.

It added that “if the outlook points to more continued inflationary pressures, including through stronger demand, the commission would react strongly if necessary”.

Economists noted that this signaled the BoE’s intention to offset the effects of tax cuts with a major rate hike at its November meeting.

Paul Dales, the UK’s chief economist at Capital Economics, said the bank’s statement contained a “not-so-subtle reference” to Friday’s mini-Budget. “Basically, the Bank has indicated that it will raise interest rates further to offset some of the increase in demand caused by the government’s budget plans,” he said.

The energy price guarantee the government had already announced would lower inflation in the near term, the MPC said, and the CPI is now likely to peak earlier than expected at just under 11 percent in October. But inflation would hover around 10 percent for several months to come, and this would not necessarily be enough to stop the high inflation expectations driving household and corporate behaviour.

Kitty Ussher, chief economist at the Institute of Directors, emphasized this warning about further price pressures in the pipeline, saying that “many of our members believe the peak [in inflation] will come next year and the price may also be accordingly, with the risk of inflation expectations fulfilling themselves.”

The BoE also confirmed it would continue with plans outlined in August to reduce the stockpile of assets it had accumulated under previous quantitative easing programs, aiming to sell gold at £80 billion in the next 12 months, bringing the total down to £758 billion.

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