The Bank of England hikes interest rates by 50 basis points for the 7 time in a row
If the US has been ultra-hawkish, the UK cannot be too far behind for the risk of monetary divergence. On Thursday, Britain’s central bank, the Bank of England, raised its key interest rate by another 50 basis points in a bid to tame inflation that has now surged to over 9.9% in the UK. Like many of the other economies like the US and EU, even the UK is facing a situation of falling growth amidst sharply rising inflation. However, the Bank of England avoided more aggressive steps to tame inflation nor did BOE sound as hawkish as the Fed.
This marks the seventh consecutive rate hike by the Bank of England and takes the benchmark rate to 2.25%. This matches the 50 basis points rate hike done last month and these mark the biggest single hike in 27 years. The rate decision of the Bank of England was to come last week, but was delayed as the United Kingdom mourned the passing away of their monarch, Queen Elizabeth II. Meanwhile, new Prime Minister Liz Truss is also expected to announce other measures to ease inflation in the short term.
Like in the US and in the EU, the seventh straight rate hike by the Bank of England was necessitated by a sharp rise in the prices of food and energy. In fact, the price of fuel and electricity has risen so sharply that this is considered to be the worst cost-of-living crisis that the UK has faced in a generation. Despite a slumping currency and rising inflation, the tight labour markets have provided enough purchasing power slack in the economy. Hence, the impact of the rate hikes on borrowing costs and consumption has got limited.
Surging inflation is a worry for the Bank of England because it depletes consumer purchasing power and inflation has never been good economics or good politics. The traditional tool to combat inflation has always been to raise the interest rates. The general logical flow would have been that a hike in interest rates makes borrowing costs high and therefore reduces demand and therefore prices. However, due to the huge labour slack and low unemployment levels, this is not having the desired impact. That is the challenge for BOE.
Inflation in the United Kingdom is currently running at a record level of 9.9%. This is very close to the inflation levels last seen during 1982. More importantly, this is nearly five times higher than the Bank of England's 2% long term inflation target. To add to that, Britain is importing a lot of inflation because the British pound is at its weakest against the dollar in the last 37 years. The Russian invasion of Ukraine only worsened the situation as Russia happens to be a very key player in the oil and gas market, and that is creating shortages.
The Bank of England has gone to the extent of warning the UK consumers that the consumer inflation would peak at 13.1% by the end of 2022, and the risk is now that it could also trigger a prolonged recession in the UK. Meanwhile, the Truss government which recently took charge after Johnson was forced to resign, has already unveiled a massive relief program. However, there are also conditions in that it caps spiralling energy bills for households and businesses. It remains to be seen how these tough stand pans out.
The Bank of England is not alone in its hawkishness. The Swiss Central Bank also announced a record rate hike, while the ECB has already hiked sharply in two tranches. Even as the world economy struggles to recover from the COVID lows, central banks are tightening. Taking a cue from the US and the UK, even the Swedish Central Bank raised its key interest rate by a full 100 basis points. It looks like hawkishness is here to stay as some of the most staid central banks used to years of low interest rates, are finally feeling the pinch of relentless inflation. The next few months could be critical.
Share Market Today
|Indices Name||Price||Price Change (% change)|
|S&P ASX 200||7015.20||27.6 (0.39%)|
|CAC 40||7243.86||-35.39 (-0.49%)|
|Dow Jones||35447.90||114.43 (0.32%)|
|FTSE 100||7454.69||-12.14 (-0.16%)|
|Hang Seng||17366.22||-161.78 (-0.92%)|
|US Tech 100||14259.41||-2.31 (-0.02%)|
|Nikkei 225||33408.39||-39.28 (-0.12%)|
|S&P 500||4557.11||6.68 (0.15%)|
|Gift Nifty||20014.50||162.5 (0.82%)|
|Shanghai Composite||3038.55||6.85 (0.23%)|
|Taiwan Weighted||17341.25||203.83 (1.19%)|
|US 30||35452.90||85.2 (0.24%)|
About the Author
DisclaimerInvestment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
Net Marinetrans India Ltd was incorporated in the year 2004 and it is engaged in the business of sea freight forwarding. Marinetrans India Ltd started off as a freight forwarder and later expanded to offer Door-to-Door Delivery and 3PL services for the logistics industry.
- Nov 28, 2023Read More
Net Avenue Technologies IPO opens for subscription on 30th November 2023 and closes for subscription on 04th December 2023.
- Nov 28, 2023Read More
On November 28, 2023, shares of One 97 Communications, the parent company of Paytm, opened 1% lower following Warren Buffett's move to sell his entire stake in the digital payment giant.
- Nov 28, 2023Read More