Bank of England hikes rate for the third time, citing Ukrainian price pressure

The BoE’s decision comes a day after the Federal Reserve announced a rate hike for the first time since 2018, penciling in six more hikes by the end of the year, and was made for similar reasons.

UK inflation hit a 30-year high in January and is expected to rise further as energy prices remain high due to Russia’s aggression. One parity is the tight jobs market, with the unemployment rate falling to a two-year low of 3.9% in the three months since January. The BoE said the rise in commodity prices since Russia’s invasion of its neighboring countries meant inflation would hit around 8% in the three months through June, and perhaps even higher later in the year.

The UK central bank raised its key rate from 0.5% to 0.75%, and said further increases may be needed in the coming months, although it added that “there are risks on both sides of that decision.”

“Global inflationary pressures will be significantly stronger in the coming months, while growth in net energy importing economies, including the United Kingdom, is likely to slow down,” the BoE said.

The British pound weakened 0.4% against the dollar and UK government bonds ended the most with lower-dated yields, a sign that investors expect the BoE to cut its key rate less bullish than before the decision. Will increase from

“It’s the opposite of what you’d expect from a rate hike. The decision itself was expected by consensus, but the language around the need for future hardening has softened,” said James Athe, an investment manager at Aberden.

The BOE’s three rate hikes in three policy meetings is its most aggressive since it was given the freedom to set interest rates in mid-1997, when it introduced four rate hikes in successive meetings. However, rising borrowing costs will add further pressure to the household budget which is set to come under pressure next month from a sharp rise in energy prices and the prospect of higher taxes.

Last month, the BoE projected that UK average income would fall by 2% this year following changes in wage hikes, inflation, tax hikes and benefits – the sharpest drop since comparable records began in 1990. The pinch is expected to hold back the broader economy only if it requires firing of all engines to rid itself of the slowdown caused by the Covid-19 pandemic and fresh headwinds from Russia’s war.

In its statement on Thursday, the BoE acknowledged that higher energy prices would squeeze household income even more, but said it should focus on controlling inflation.

“This is something that monetary policy has been unable to stop,” BoE said. “The role of monetary policy is to ensure that, as this real economic adjustment occurs, it is consistent with achieving the 2% inflation target.”

However, the impact of higher energy prices on household spending power persuaded policymaker John Cunliffe to vote against the rate hike, preferring to leave borrowing costs at 0.5%.

Some other central banks in Europe are also raising their key interest rates. The European Central Bank said last week that it could end its longstanding bond-buying program in three months through September, raising its key rate for the first time since 2011.

However, some are tightening monetary policy at the same time that their government is increasing taxes. The UK government has already announced an increase in its tax rate on company profits, as well as a £13 billion increase in income taxes, the equivalent of $17 billion, aimed at helping care for the elderly.

It has also suspended the common practice of raising its income limit for different rates of income tax in line with inflation. The Institute for Fiscal Studies, a non-partisan research body, estimated on Tuesday that the increase in inflation since the announcement would mean the government would likely freeze £20.5bn, more than double the £8bn initially announced. More than.

UK exports to Russia and Ukraine are not significant, but the economy is expected to slow as rising energy prices reduce domestic spending on other goods and services, while trade confidence weakens and uncertainty over Europe’s response to the war. Brings about the future.

In recent decades, the BOE has responded to similar threats to growth by cutting its key interest rate and increasing its bond purchases. It was a response to both the UK’s vote to leave the European Union in 2016 and the start of the COVID-19 pandemic in 2020.

However, its decision to raise rates on Thursday indicated that this time policymakers are more concerned with inflation going out of control and not about weakening economic growth.