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Bank of England Raises Rates Again as Inflation Persists Bank of England Raises Rates Again as Inflation Persists
(30 minutes later)
The Bank of England raised interest rates by a quarter-point on Thursday, its 11th consecutive rate increase, a day after data showed that Britain’s inflation rate unexpectedly increased last month, providing an unwelcome setback in the central bank’s struggle against rapidly rising prices. The Bank of England raised interest rates a quarter-point on Thursday, its 11th consecutive rate increase, a day after data showed that Britain’s inflation rate unexpectedly increased last month, providing an unwelcome setback in the central bank’s struggle against rapidly rising prices.
The bank’s policy decision came amid heightened tension for central banks following turmoil in the U.S. and Swiss banking systems that spurred global central bankers into protective action to shore up financial stability. On Thursday, the Bank of England affirmed that Britain’s banking system was “resilient” and able to withstand a period of higher interest rates, according to the minutes of this week’s policy meeting. The bank acted amid heightened tension for central banks after turmoil in the U.S. and Swiss banking systems spurred global central bankers into protective moves to shore up financial stability. On Thursday, the Bank of England affirmed that Britain’s banking system was “resilient” and able to withstand a period of higher interest rates, according to the minutes of this week’s policy meeting.
The market woes have also created the sense that policymakers on both sides of the Atlantic are battling two opposing risks: that inflation will remain persistent and need to be tackled with higher interest rates, and that higher rates will worsen the turmoil in the banking sector. The market woes have also created the sense that policymakers on both sides of the Atlantic are battling two opposing risks: that inflation will remain persistent and need to be tackled with higher interest rates, and that higher rates will worsen the turmoil in banking.
But over the past week, central bankers have persevered with raising interest rates and emphasized other tools that can be used to maintain financial stability.But over the past week, central bankers have persevered with raising interest rates and emphasized other tools that can be used to maintain financial stability.
The European Central Bank last week raised rates by half a percentage point, and on Wednesday the Federal Reserve raised rates by a quarter of a percentage point and implied it would carry out just one more rate increase this year. The European Central Bank raised rates half a percentage point last week, and on Wednesday the Federal Reserve raised rates a quarter-point and implied it would carry out just one more rate increase this year.
And earlier on Thursday, the Swiss National Bank, the country’s central bank, raised interest rates by half a percentage point, to 1.5 percent, to counter “the renewed increase in inflationary pressures.” The decision came just days after one of the country’s largest banks, Credit Suisse, was bought by its larger rival, UBS, in a deal hastily brokered by the government to stem a growing banking crisis. Earlier on Thursday, the Swiss National Bank, the country’s central bank, raised interest rates half a point, to 1.5 percent, to counter “the renewed increase in inflationary pressures.” The decision came just days after one of the country’s largest banks, Credit Suisse, was bought by its larger rival, UBS, in a deal hastily brokered by the government to stem a growing banking crisis.
Since December 2021, the Bank of England’s policymakers have raised interest rates to 4.25 percent, from near zero, in an effort to stamp out high inflation.Since December 2021, the Bank of England’s policymakers have raised interest rates to 4.25 percent, from near zero, in an effort to stamp out high inflation.
Consumer prices rose 10.4 percent in February from a year earlier, up from 10.1 percent the month before, ending a three-month downward trend and stubbornly keeping inflation in the double digits, according to data published on Wednesday. The central bank had forecast that the inflation rate would fall to 9.9 percent. Consumer prices rose 10.4 percent in February from a year earlier, up from 10.1 percent the month before, ending a three-month downward trend and stubbornly keeping inflation in the double digits, according to data published on Wednesday. The central bank had forecast that the inflation rate would fall to 9.9 percent.
The data came after the bank had shifted its tone to indicate that future interest rate increases were not a given. Last month, policymakers said they would respond to signs of inflation being more persistent than they expected, leading analysts to predict the bank was close to halting rate increases. Previously, the bank had shifted its tone to indicate that future interest rate increases were not a given. Last month, policymakers said they would respond to signs of inflation’s being more persistent than they expected, leading analysts to predict the bank was close to halting rate increases.
Policymakers stuck to their message this week. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the minutes said.Policymakers stuck to their message this week. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the minutes said.
Traders and analysts are increasingly betting the bank will now halt rate increases as policymakers weigh the impact of past rate increases and unease in the banking sector. The pause could bring some relief to the substantial number of mortgage holders in Britain, whose short-term fixed rates are set to expire this year. Traders and analysts are increasingly betting the bank will now halt rate increases as policymakers weigh the impact of past increases and unease in the banking sector. The pause could bring some relief to the substantial number of mortgage holders in Britain, whose short-term fixed rates are set to expire this year.
Financial markets indicate that the bank’s policy rate will peak in August, about quarter-point higher than it is now. But traders aren’t betting that rates will be moved higher at the bank’s next policy meeting in May, when inflation is expected to be on a more firm downward path. Financial markets indicate that the bank’s policy rate will peak in August, about quarter-point higher than it is now. But traders aren’t betting that rates will be moved higher at the bank’s next policy meeting in May, when inflation is expected to be on a more firm downward path.
The Bank of England forecast that the inflation rate would fall significantly this year, and average about 4 percent around the end of the year. In fact, inflation is expected to fall more than expected in the second quarter of this year because of the government’s decision to extend its subsidy for household energy bills for an additional three months to the end of June. And wage growth has been weaker than expected, easing policymakers’ concerns that high wages in the private sector would make it harder to return inflation to the bank’s 2 percent target. The Bank of England forecast that the inflation rate would fall significantly this year, and average about 4 percent around the end of the year. In fact, inflation is expected to fall more than expected in the second quarter because of the government’s decision to extend its subsidy for household energy bills for an additional three months to the end of June. And wage growth has been weaker than expected, easing policymakers’ concerns that high wages in the private sector would make it harder to return inflation to the bank’s 2 percent target.
Additionally, the recent turmoil in banking sector could tighten financial conditions so that policymakers don’t need to increase rates as aggressively. At the moment, “it was unclear how credit conditions and economic activity might be affected by recent banking sector stress in a number of advanced economies,” the Bank of England said. But it noted that, in Britain, wholesale bank funding costs, a measure of how much it costs banks to borrow money, particularly for short periods, had risen, a sign of increased risk in the banking sector. Additionally, the recent banking turmoil could tighten financial conditions so that policymakers don’t need to increase rates as aggressively. At the moment, “it was unclear how credit conditions and economic activity might be affected by recent banking-sector stress in a number of advanced economies,” the Bank of England said. But it noted that, in Britain, wholesale bank funding costs, a measure of how much it costs banks to borrow money, particularly for short periods, had risen, a sign of increased risk in the banking sector.
“The incoming data appears to be weakening the case for further rate rises,” Martin Beck, an economic analyst at EY, wrote in a note. He argued the central bank would pause rate increases because wage growth was easing and energy prices were lower. “The incoming data appears to be weakening the case for further rate rises,” Martin Beck, an economic analyst at EY, wrote in a note. He argued that the central bank would pause rate increases because wage growth was easing and energy prices were lower.
“Any further stresses that may emerge in the next few months in the financial system, following a global tightening of monetary policy, might necessitate a change of course by central banks in general,” Mr. Beck added.“Any further stresses that may emerge in the next few months in the financial system, following a global tightening of monetary policy, might necessitate a change of course by central banks in general,” Mr. Beck added.
Andrew Bailey, the governor of the central bank, told reporters after last month’s meeting that there had been a “turning of the corner” on inflation but warned “it’s very early days, and the risks are very large.” Andrew Bailey, the governor of the central bank, told reporters after last month’s meeting that there had been a “turning of the corner” on inflation but warned that “it’s very early days, and the risks are very large.”
To some extent, those risks materialized in the surprising upturn in Wednesday’s data, which showed food prices rising in February at their fastest pace in 45 years and a measure of services inflation increasing. The meeting of Bank of England policymakers this week showed the challenge the bank faces in determining the path of inflation.To some extent, those risks materialized in the surprising upturn in Wednesday’s data, which showed food prices rising in February at their fastest pace in 45 years and a measure of services inflation increasing. The meeting of Bank of England policymakers this week showed the challenge the bank faces in determining the path of inflation.
“We have raised rates a lot already, we believe inflation will begin to fall quite rapidly before the summer but as yesterday’s release for February showed, we need to see that actually happen,” Mr. Bailey said in a video posted by the bank on Thursday. “We have raised rates a lot already, we believe inflation will begin to fall quite rapidly before the summer, but as yesterday’s release for February showed, we need to see that actually happen,” Mr. Bailey said in a video posted by the bank on Thursday.
The increase in inflation came from rising food prices and higher prices for goods, namely clothing and footwear. Those prices “tend to be volatile and could therefore prove less persistent,” according to the minutes of the bank’s meeting.The increase in inflation came from rising food prices and higher prices for goods, namely clothing and footwear. Those prices “tend to be volatile and could therefore prove less persistent,” according to the minutes of the bank’s meeting.
But there was some hesitancy over this assessment about whether the surprise in inflation was simply a one-off or whether some aspects of inflation were being driven higher by other, less clear, underlying factors. Seven of the bank’s nine policymakers voted to raise rates this week because they thought it was possible that the economy was stronger than expected, driven by more demand rather than the benefits of lower energy prices, according to the minutes. But there was some hesitancy over this assessment about whether the surprise in inflation was simply a one-off or whether some aspects were being driven higher by other, less clear, underlying factors. Seven of the bank’s nine policymakers voted to raise rates this week because they thought it was possible that the economy was stronger than expected, driven by more demand rather than by the benefits of lower energy prices, according to the minutes.
The Bank of England no longer expects the British economy to suffer a recession this year, with two consecutive quarters of economic contraction, because it predicts gross domestic product to increase “slightly” in the second quarter. The Bank of England no longer expects a recession this year, with two consecutive quarters of economic contraction, because it predicts Britain’s gross domestic product to increase “slightly” in the second quarter.
“Renewed and sustained demand for labor could still reinforce the persistence of higher costs in consumer prices,” the minutes said, even if the effects of higher energy prices on inflation diminished over time. “Renewed and sustained demand for labor could still reinforce the persistence of higher costs in consumer prices,” the minutes said, even if the effects of higher energy prices on inflation diminish over time.
Given the levels of uncertainty, some analysts have warned against the Bank of England signaling the end of rate increases. Given the levels of uncertainty, some analysts have warned against the Bank of England’s signaling the end of rate increases.
“The persistence of inflation appears more worrying in the U.K. than elsewhere, reflecting the fact that the combination of Brexit, the pandemic and an energy crisis appears to have done more lasting damage to the supply side of the economy,” Karen Ward, a strategist at JPMorgan Asset Management and former government economic adviser. “The persistence of inflation appears more worrying in the U.K. than elsewhere, reflecting the fact that the combination of Brexit, the pandemic and an energy crisis appears to have done more lasting damage to the supply side of the economy,” Karen Ward, a strategist at J.P. Morgan Asset Management and former government economic adviser.
The rate-setting committee has been divided for months on rate increases. For a third consecutive meeting, two policymakers, Swati Dhingra and Silvana Tenreyro, voted to hold rates steady, arguing that the full effects of higher interest rates were yet to be seen, and so the bank’s monetary policy stance was likely to push inflation “well below” the central bank’s 2 percent target, the minutes said.The rate-setting committee has been divided for months on rate increases. For a third consecutive meeting, two policymakers, Swati Dhingra and Silvana Tenreyro, voted to hold rates steady, arguing that the full effects of higher interest rates were yet to be seen, and so the bank’s monetary policy stance was likely to push inflation “well below” the central bank’s 2 percent target, the minutes said.