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Bank of England raises rates but avoids more aggressive action

LONDON — Britain’s central bank on Thursday raised its key rate by another half a percentage point to the highest level in 14 years, but it avoided more aggressive measures to control inflation taken by the US Federal Reserve and others banks around the world.

It is the Bank of England’s seventh consecutive decision to raise borrowing costs as rising food and energy prices fuel a cost of living crisis believed to be the worst in a decade. generation. Despite a plummeting currency, a tight labor market and inflation nearing its highest level in four decades, officials held back from acting more boldly in predicting a second consecutive decline in economic output this quarter, an informal definition of recession.

The bank matched its half-point increase last month – the biggest in 27 years – to take its benchmark rate to 2.25%. The decision was delayed for a week as the UK mourned Queen Elizabeth II and comes after new Prime Minister Liz Truss’ government unveiled a massive relief package to help consumers and businesses make in the face of soaring energy bills.

The new measures have eased uncertainty about energy costs and are “likely to significantly limit further increases” in consumer prices, bank policymakers said. They expected inflation to peak at 11% in October, lower than previous forecasts.

“Nevertheless, energy bills will rise further and, combined with the indirect effects of rising energy costs, inflation is expected to remain above 10% for the next few months before starting to fall,” he said. said the monetary policy committee.

The bank signaled that it was ready to react more forcefully at its November meeting if necessary. His decision comes in a busy week for central bank action marked by much more aggressive measures to bring down soaring consumer prices.

The U.S. Federal Reserve raised rates Wednesday by three-quarters of a point for the third straight time and forecast more bigger hikes to come. Also on Thursday, the Swiss central bank decreed its biggest increase in its key rate.

Three of nine members of the UK bank’s committee wanted a similar three-quarter point increase, but were outvoted by five who preferred half a point and one who voted for a quarter point.

The decision “suggests the Bank of England is concerned about the deteriorating economic outlook for the UK in the face of the looming threat of recession,” said Victoria Scholar, chief investment officer at Interactive Investor. “The tentative increase will do little to stem the pound’s fall, but may avoid inadvertently inducing unnecessary pain for the economy which is already struggling with slowing demand and deteriorating trust.”

Soaring inflation is a concern for central banks because it undermines economic growth by eroding citizens’ purchasing power. Raising interest rates – the traditional inflation-fighting tool – reduces demand and therefore prices by making it more expensive to borrow money for big purchases like cars and houses.

Inflation in the UK stands at 9.9%, close to its highest level since 1982 and five times higher than the Bank of England’s 2% target. The pound sterling is at its weakest level against the dollar in 37 years, contributing to imported inflation.

To ease the crisis, Truss’ government announced it would cap household and business energy bills that have soared as Russia’s war in Ukraine drives up the price of natural gas needed for heating.

The Treasury is expected to release a “mini-budget” with more economic stimulus measures on Friday, and the bank said it would not be able to assess how they will affect inflation until its next meeting in November.

The Bank of England expects gross domestic product to fall 0.1% in the third quarter, below its August forecast of 0.4% growth. It would be a second quarterly decline after official estimates showed production fell 0.1% in the previous three months.

The weakness partly reflects a weaker-than-expected rebound after an additional holiday in June to celebrate the Queen’s 70 years on the throne and the impact of another bank holiday Monday for her funeral, officials said.

The bank has avoided pressure to expand even as other banks around the world take aggressive action against inflation fueled by the global economy’s recovery from the COVID-19 pandemic and then the war in Ukraine. .

This month, Sweden’s central bank raised its key rate by one percentage point, while the European Central Bank made its biggest ever rate hike with a three-quarters point hike for all 19 countries. who use the euro.

But UK policymakers have indicated they will “react forcefully, if necessary” if there are signs that inflationary pressure is more persistent than expected, “including due to stronger demand”.

The bank said it was also moving forward with plans to reduce its bond holdings built up as part of a stimulus package, selling 80 billion pounds ($90 billion) of assets during next year to reduce its portfolio to 758 billion pounds.

ABC News

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