UK joins U.S and India in rates hike
The UK has joined the current rush by central banks the world over to increase interest rates in the face of soaring inflation.
5 May 2022On Thursday afternoon, the Bank of England announced a quarter per cent rise to 1% - the fourth rise since December.
The move came a day after the Federal Reserve in the US, the Reserve Bank of India (RBI) and the Reserve Bank of Australia (RBA) all announced rate rises of their own.
The latest increase in the UK means rates are at their highest level since 2009 and comes at a time when inflation, at around seven per cent, is at its highest for 30 years and is expected to be in double figures by year's end.
"UK GDP growth is expected to slow sharply over the first half of the forecast period. That predominantly reflects the significant adverse impact of the sharp rises in global energy and tradeable goods prices on most UK households' real incomes and many UK companies' profit margins."
Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said the latest rise in interest rates was warranted, given the persistence of high inflation.
"However," he added, "the Monetary Policy Committee are walking an increasingly fine line. Further action to curb price pressures needs to be weighed against the increasing need to protect growth, particularly in light of a historic cost-of-living crunch. Households are feeling it and so are businesses, with cost pressures across the board.
“While monetary policy is the appropriate first line of defence in tackling inflation, government needs to take further action to shore up the broader resilience of the UK economy."
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Kitty Ussher, chief economist of the Institute of Directors, said she welcomed the Bank of England’s judgment that the need to tackle high expectations of inflation was of greater concern than the risk of curbing demand too fast in the short-term.
“The Bank has said it expects inflation to be near the 2% (inflation) target two years from now, which will be welcome to business leaders," she added.
“The Bank has also signalled that further interest rate rises are on the cards, to around 2.5% this time next year. If, however, cost of living pressures cause households to rein back on discretionary spending, or further difficulties in our export markets cause British companies to suffer lower orders, this assumption may need to be revised.”
Further rises are also expected in the US, where the Fed announced on Wednesday its largest rate rise in more than two decades, increasing the benchmark rate by half a percentage point to a range of .75-1%.
India's move to raise the benchmark interest rate for the first time in two years surprised many analysts. The RBI raised the rate at which it lends to commercial banks from four per cent 4.4%.
Shaktikanta Das, the central bank governor, said: "Inflation-sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India." Mr Das said this, along with pandemic lockdowns in major production hubs such as China, would probably "accentuate global supply chain bottlenecks while depressing growth" and increase inflation in India.
It was a similar story in Australia, where inflation has reached a 21-year high of 5.1%. For the first time in more than a decade, the central bank raised the benchmark interest rate to 0.35%, up from a record low of 0.1%.
Philip Lowe, the RBA governor, said that although inflation had increased at a faster rate than expected, unemployment was low and there was evidence wage growth would improve.
It was time to withdraw "some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic", he said, while warning that further rises were "imminent".
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The move came a day after the Federal Reserve in the US, the Reserve Bank of India (RBI) and the Reserve Bank of Australia (RBA) all announced rate rises of their own.
The latest increase in the UK means rates are at their highest level since 2009 and comes at a time when inflation, at around seven per cent, is at its highest for 30 years and is expected to be in double figures by year's end.
Interest rates continue to grow
While the bank's Monetary Policy Committee (MPC) accepted there were "risks" in raising rates, it said the global rise in inflation had been exacerbated by Russia's invasion of Ukraine. "This has led to a material deterioration in the outlook for world and UK GDP growth," the MPC said."UK GDP growth is expected to slow sharply over the first half of the forecast period. That predominantly reflects the significant adverse impact of the sharp rises in global energy and tradeable goods prices on most UK households' real incomes and many UK companies' profit margins."
Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said the latest rise in interest rates was warranted, given the persistence of high inflation.
"However," he added, "the Monetary Policy Committee are walking an increasingly fine line. Further action to curb price pressures needs to be weighed against the increasing need to protect growth, particularly in light of a historic cost-of-living crunch. Households are feeling it and so are businesses, with cost pressures across the board.
“While monetary policy is the appropriate first line of defence in tackling inflation, government needs to take further action to shore up the broader resilience of the UK economy."
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Kitty Ussher, chief economist of the Institute of Directors, said she welcomed the Bank of England’s judgment that the need to tackle high expectations of inflation was of greater concern than the risk of curbing demand too fast in the short-term.
“The Bank has said it expects inflation to be near the 2% (inflation) target two years from now, which will be welcome to business leaders," she added.
“The Bank has also signalled that further interest rate rises are on the cards, to around 2.5% this time next year. If, however, cost of living pressures cause households to rein back on discretionary spending, or further difficulties in our export markets cause British companies to suffer lower orders, this assumption may need to be revised.”
Further rises are also expected in the US, where the Fed announced on Wednesday its largest rate rise in more than two decades, increasing the benchmark rate by half a percentage point to a range of .75-1%.
Will we see a decrease in inflation over the next coming months?
With inflation hitting a 40-year high of 8.5% in March, driven by rocketing energy and food prices, Jerome Powell, who chairs the Federal Reserve, said: "Inflation is much too high and we understand the hardship it is causing. We are moving expeditiously to bring it back down."India's move to raise the benchmark interest rate for the first time in two years surprised many analysts. The RBI raised the rate at which it lends to commercial banks from four per cent 4.4%.
Shaktikanta Das, the central bank governor, said: "Inflation-sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India." Mr Das said this, along with pandemic lockdowns in major production hubs such as China, would probably "accentuate global supply chain bottlenecks while depressing growth" and increase inflation in India.
It was a similar story in Australia, where inflation has reached a 21-year high of 5.1%. For the first time in more than a decade, the central bank raised the benchmark interest rate to 0.35%, up from a record low of 0.1%.
Philip Lowe, the RBA governor, said that although inflation had increased at a faster rate than expected, unemployment was low and there was evidence wage growth would improve.
It was time to withdraw "some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic", he said, while warning that further rises were "imminent".
Read more news and views from David Sapsted in the Spring 2022 issue of Think Global People.
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