2023-08-04 05:28:00
The Bank of England raised its rates by 0.25 percentage point on Thursday August 3, to a high since the beginning of 2008 at 5.25%, to fight against inflation which it expects to be more persistent, despite its decline in recent month.
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The Bank of England in London. Photo: AFP/VNA/CVN
“Certain crucial indicators, including wage increases, suggest that more persistent inflationary pressures are materializing. The (Monetary Policy, or MPC) Committee decided at this meeting to raise rates” for the 14th consecutive time, justifies the central bank in the minutes of its meeting.
The Bank of England opts for an increase of the same magnitude as those of the American Federal Reserve (Fed) and the European Central Bank (ECB) at the end of July, even if the British monetary authority revises slightly upwards its forecasts for longer-term inflation: 2.5% in 2024 and 1.5% in 2025.
According to the latest available data, inflation remains at 7.9% year on year in the United Kingdom in June, the highest among the rich G7 countries despite a marked slowdown, fueling a crisis in the cost of living across the Channel.
“Inflation is falling and that’s good news. We know inflation hits the less wealthy most directly and we need to make sure it comes back down to our 2% target,” said BoE boss Andrew Bailey in a statement.
The prices of goods and raw materials, notably energy, have caused inflation to soar after the successive shocks of Brexit, COVID-19 and then the crisis in Ukraine, but it is now the inflation generated within the United Kingdom itself which worries the central bank.
Criticized for having underestimated the magnitude of these shocks, the BoE claims to have revised its projections since its last report in May to “integrate some of the upside risks for inflation, local prices and wages” .
The central bank assumes “a restrictive monetary policy”, which weighs on growth, and promises that “the MPC will ensure that the bank rate remains sufficiently restrictive long enough” to deflect inflation.
“Our policy is starting to have an effect. Given the delays in the transmission of economic policy to the real economy, it is not surprising that it has taken time,” Bailey told a conference. Press.
Brushing recession
This weight on the economy should not send the United Kingdom into recession, believes the BoE, but the central bank now forecasts sluggish growth of 0.5% in 2024 and 0.25% in 2025, less well. than its already gloomy May projections (at 0.75% in 2024 and 0.75% in 2025).
Rate hikes undermine the borrowing power of households and businesses alike. And with mortgages not being fixed for the long term in the UK, many homeowners are seeing their rates go up.
Prime Minister Rishi Sunak, who had promised when he came to power to halve inflation, then in double digits, supports the central bank in its action.
“But that does not mean that it is easy for families facing higher monthly payments on their mortgages, so we will continue to do what we can to help households”, assured Thursday August 3 the Minister of Finance, Jeremy Hunt, in a statement.
The central bank’s strategy divides even within the MPC: two of its nine members wanted to raise rates by 0.5 percentage points, and one voter wanted to leave rates unchanged to avoid dragging down the economy.
The central bank did not amend its message and still warns that, “if there is evidence of persistent inflationary pressures, more monetary policy tightening would be necessary”.
On the foreign exchange market, the pound remained at half mast on Thursday August 3, some investors having hoped for a clearer message from the BoE.
“The BoE’s new forecasts suggest that more upside is likely, but the top is approaching,” said Samuel Tombs, analyst at Pantheon MacroEconomics.
AFP/VNA/CVN
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