The central bank’s Monetary Policy Committee said Thursday that it would raise interest rates from the record low of 0.1% to 0.25%, the first such move by any major central bank since the start of the pandemic.
The Bank of England said it expects prices to rise further.
“Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022,” the central bank said in a statement on Thursday. Energy costs and pay rises would play a big part in driving inflation higher next year, it added.
Economists and investors had expected the Bank of England to raise interest rates in November in order to combat rising prices. But the central bank surprised observers by holding its fire, making a December hike all but certain until recent days, when Omicron began to spread rapidly.
Higher official interest rates can raise the cost of borrowing for businesses and households, as well as encouraging people to save more, thereby helping to reduce demand and inflation. But they can also take some of the heat out of the economy.
With inflation running two and a half times above the central bank’s 2% target, price concerns overshadowed worries about the potential of the Omicron variant to damage the economy.
“Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage,” the Bank of England said.
Holger Schmieding, an economist at Berenberg, said it could take up to a year and a half for the rate hikes to have an effect on inflation. By then, any economic damage caused by Omicron will have faded.
“Delaying the hike amid elevated uncertainty, as most pundits expected, would have been understandable. But it would not really have made sense. Inflation pressures are elevated and look set to remain so in the UK, partly due to pronounced labor shortages and the legacy of five years of underinvestment since the 2016 Brexit referendum,” he said in a research note.
European Central Bank cuts growth forecast
The world’s most influential central banks responded to the pandemic with massive stimulus efforts. But their approaches are now diverging, with the US Federal Reserve signaling three rate hikes next year while the European Central Bank is maintaining looser policy.
The ECB held rates steady on Thursday as it cut its growth forecast for the eurozone economy in 2022. The central bank announced that it would end asset purchases under its €1.85 trillion ($2.1 trillion) pandemic stimulus program in March 2022, but it also said it would step up bond buying under a separate program.
The end result is that the ECB will reduce the amount of money it’s pumping into the economy from an average of €92 billion ($104 billion) a month this year to roughly half that amount in April 2022, according to Capital Economics. Interest rate hikes are not on the horizon at present, despite ECB projections showing inflation is likely to average 3.2% next year, way above the bank’s 2% target.
“Economic activity has been moderating over the final quarter of the year and this slower growth is likely to extend into the early part of next year,” ECB President Christine Lagarde told reporters..
The US Federal Reserve announced Wednesday that it will wrap up its stimulus program faster than originally announced, and its updated economic projections show multiple interest rate increases in 2022.
Fed Chair Jerome Powell acknowledged that there’s a risk that the pandemic-era inflation will stick around for longer than initially expected.
“One of the reason the behind our move today is to put us in a position,” to deal with inflation, Powell said.
For all the latest world News Click Here
