UK central bank hikes rates like Fed amid financial turmoil

UK central bank hikes rates like Fed amid financial turmoil

LONDON (AP) — The Bank of England stepped up its fight against inflation, announcing an 11th consecutive interest rate hike despite concerns about the economic fallout from problems in the global financial system.

Britain’s central bank raised its key rate by a quarter-percentage point to 4.25%, a day after the U.S. The Federal Reserve approved a similar move to reduce price increases, which are squeezing household budgets and slowing economic growth.

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The decision was taken after the unexpected news that UK inflation rose to 10.4% in February, driven by the cost of food, clothing and eating out. Before the figures were released on Wednesday, many analysts had expected the Bank of England to hold rates steady following the collapse of two US banks and its hastily arranged takeover of Swiss banking giant Credit Suisse.

“A banking curve ball has been thrown into the Bank of England’s already tangled game, but for now policymakers’ eyes are still firmly trained on catching inflation and getting it under control,” Hargreaves in Wealth And said Susannah Streeter, head of markets at Lansdowne, which manages more than 120 billion pounds ($147 billion) for investors.

Still, Thursday’s move was the smallest rate hike since May 2022, with the Bank of England forecasting inflation to fall to 2.9% by the end of the year as energy costs fell and last year’s rate hike was left out of the reckoning. A huge price hike was registered.

As it did last month, the central bank indicated it no longer projected a further rate hike, saying only that it would closely monitor price pressures in the economy.

The bank said, “If there is evidence of continuing pressure, there will be a need for further tightening of monetary policy.”

Raising interest rates increases the cost of borrowing, which reduces spending and relieves upward pressure on prices. But it also tends to slow economic growth.

Central bankers around the world are struggling to balance competing economic demands as they try to rein in inflation, which erodes savings and raises costs for consumers and businesses, without unnecessarily damaging economies weakened by the COVID-19 pandemic and Russia’s war in Ukraine.

Following the collapse of Silicon Valley Bank in the United States and turbulence in the global financial system, policymakers worry that banks around the world may cut back on lending, further reducing economic growth.

The Bank of England said on Thursday that it had determined that British banks are “resilient”.

“The UK banking system maintains strong capital and strong liquidity conditions and is well placed to continue supporting the economy across a wide range of economic scenarios, including periods of high interest rates,” the central bank said.

It echoed the words of Fed Chair Jerome Powell, who sought to reassure Americans that their bank deposits were safe as the Fed raised its key rate by a quarter point on Wednesday.

The Swiss central bank also rose half a point on Thursday and announced that the government-orchestrated takeover of Credit Suisse by Swiss rival UBS “prevented the crisis.”

A week ago, the European Central Bank raised rates by half a point, warding off financial market jitters and asserting Europe’s banking sector was resilient.

The Bank of England was among the first to raise borrowing costs following a long period of low interest rates following the 2008 global financial crisis. In 11 hikes from December 2021, the key rate rose by just 0.1% to 4.25%.

UK central bank hikes rates like Fed amid financial turmoil

A rapid rise in interest rates around the world squeezed the finances of some banks as it eroded the value of their bond holdings.

As they assess the potential impact that higher rates are having on banks, policymakers are also weighing how long the recent increases will take to flow through to the wider economy.

If they wait too long to stop raising rates, they risk puncturing already bloodless growth. If they close too soon, they run the risk of inflation seeping into the economy.

Luke Bartholomew, senior economist at UK-based fund manager abrdn, said he expects Thursday’s move to be the final rate hike of the cycle as the effects of previous hikes and recent market volatility begin to slow economic growth.

“However, there is still a significant risk of an eventual rate hike if inflation proves to be little stable in the coming months,” he said.

The Bank of England has to make that decision in a more complex environment than other central bankers.

High levels of dependence on natural gas and limited storage capacity left British energy users particularly exposed to increases in global gas prices following Russia’s invasion of Ukraine. Britain is still adjusting to the effects of leaving the European Union, which reduced trade with its neighbors, reduced the supply of cheap labor and slowed economic growth.

Britain’s inflation is stuck above 10%, while in the 20 countries that share the euro it was 8.5% last month and in the US. fell to 6%.

Treasury chief Jeremy Hunt praised the central bank’s decision.

“Rising prices are stifling growth and squeezing family budgets. The sooner we bring inflation under control, the better it is for all,” he said.


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