Photo: ANP
The Bank of England (BoE) once again raised the UK key interest rate by 0.5 percentage point. Last month, the Bank of England raised interest rates by the same number. At the time, it was the largest rate hike since 1995. The Bank of England wants to use it to combat high inflation, which slowed slightly in August but is still at a forty-year high.
The Bank of England was one of the first central banks to start raising interest rates in December last year, and has now raised them seven times in a row, to 2.25%. Thus the rate of interest returned to the level it was in 2008. By raising the rate of interest, it becomes more expensive to borrow money and less money is available, which would push prices down.
The interest rate move was 0.5 percentage point in line with economists’ expectations. Central Bank policy makers were not unanimous on the interest rate decision. Three of the nine board members voted for a 0.75 percentage point rate increase and one of them favored a 0.25 percentage point rate step. Policy makers also stated that they will continue to take aggressive measures to combat inflation.
UK inflation eased slightly to 9.9 percent in August from 10.1 percent in July. This is mainly due to lower gasoline prices. However, inflation is still nearly five times higher than the central bank’s 2% inflation target. The Bank of England now expects inflation to peak below 11% in October. Previously, the peak level was assumed to be more than 13 percent.
The lower inflation expectations came as a result of the new package of energy measures from the new government of Prime Minister Liz Truss. These measures should keep energy bills for homes and businesses in check. Nor will the increase in electricity prices that would have occurred in October.
Thanks to these support measures, the deep economic recession that the central bank previously predicted may be less severe than expected, central bankers predict. In the third quarter, the British economy is expected to contract 0.1 percent, due in part to an extra day off due to Queen Elizabeth’s funeral. The economy will technically end in recession this quarter, after the previous downturn in the second quarter.
