Tuesday, July 23, 2024

Bank of England raises interest rates to 2.25%


Last month, the bank predicted that the economy would weaken throughout the next year as household incomes drastically shrunk due to high inflation, which would put the country into the longest recession since the 2008 financial crisis. On Thursday, the bank provided no recession. This view is updated in light of government energy policies and tax plans, which it said are likely to have a “material” impact on the country’s economic outlook.

Policy makers who voted to raise the rate by half a point, including Bank Governor Andrew Bailey, have argued that a tight labor market, with a larger-than-expected share of people unemployed and not looking for jobs, and sustained wage growth above target-compatible levels Bank inflation Ensures an “extra and strong” increase in rates. They argued that a freeze on home energy bills means demand is likely to be higher than previously expected, adding that a freeze would not be enough to lower expectations of high inflation on its own.

The three members who voted for a three-quarter point increase said they wanted to reduce the risks of a “longer and more expensive tightening cycle later,” arguing that there are already more persistent inflationary pressures and that expectations for future price hikes remain high.

The committee’s new member, Swati Dhingra, professor of economics at the London School of Economics, voted at its first meeting a quarter-point increase, arguing that some of the consequences of high inflation, for example on service prices, would fade. But it acknowledged that demand-side pressure may increase, partly due to expected changes in fiscal policy.

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These policies, for which the government has not yet provided official cost estimates, are expected to significantly increase the amount of bonds the government will need to sell to raise money to support energy bills for households and businesses. The Office of Budget Responsibility, an independent watchdog, said the measures would “significantly raise borrowing” over the next six months.

Bank of England policy makers have unanimously agreed to start selling government bonds back to the market, increasing the supply of British debt offered to private investors. Over the next 12 months, the bank will reduce its bond holdings by £80 billion through sales and redemptions, to £758 billion. The bank said there would be a significant obstacle to changing this plan.

Rabobank’s Mr Copeman wrote: “The Bank of England, however, can only maintain such a relatively gradual pace of rate hikes, if Truss and her team are able to reassure markets that they have a plan on how they will ultimately provide a equilibrium in public expenditure “.



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