Bank of England makes biggest rate increase in decades, may worsen cost-of-living crisis for millions

BOE lifts borrowing costs by 0.75 percentage points to 3 per cent, its highest level since 2008
UK’s annual inflation stands above 10 per cent, its highest level in 40 years

Banking & finance

Chad Brayin LondonandAgencies

Published: 3:41pm, 3 Nov, 2022

Why you can trust SCMP

The Bank of England (BOE) raised its key interest rate by 75 basis points on Thursday in its biggest interest-rate increase in three decades, as it tries to tackle persistent double-digit inflation in the midst of a cost-of-living crisis in Britain.

In a widely expected move, the central bank’s Monetary Policy Committee (MPC) raised its borrowing rate to 3 per cent, which is the highest level the rate has been since November 2008 in the middle of the global financial crisis. The 75-basis point move is the biggest single interest-rate increase since 1989 and mirrors a similar move by the US Federal Reserve on Wednesday.

The rate increase will put additional pressure on millions of ordinary Britons and small businesses that are struggling with inflation levels not seen in 40 years.

Inflation topped 10.1 per cent in September, driven by surging food and energy prices, according to government figures. The BOE has a 2 per cent target for inflation.

Rising rates, topsy-turvy pound hurt BN (O) migrants’ path to home ownership

“The majority of the committee judges that, should the economy evolve broadly in line with the latest monetary policy report projections, further increases in bank rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets,” the MPC said.

“There are, however, considerable uncertainties around the outlook,” it added. “The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”

The BOE began raising rates last December and Thursday’s was the eighth consecutive rate increase by the central bank.

The committee said the British economy is likely entering a recession and could be in a recession for a “prolonged period”, with inflation likely elevated at more than 10 per cent in the near term. Gross domestic product is likely to decline throughout 2023 to mid-2024, the committee said. Inflation is likely to decline sharply from mid-2023, conditioned in part on the elevated path of interest rates.

02:14

Rishi Sunak set to be UK’s next prime minister

The pound fell by 1.4 per cent to US$1.124 ahead of the BOE announcement.

A plan by former Prime Minister Liz Truss to tackle the cost-of-living crisis by borrowing billions of pounds to help the public and small businesses with soaring energy bills, while simultaneously cutting taxes by the biggest amount in a half-century unnerved markets in September, sending the pound to its lowest level against the US dollar in 50 years.

The mini budget sent mortgage rates skyrocketing in Britain and forced the BOE to step in and buy government bonds to stabilise the markets. Truss resigned after just seven weeks in office as the Conservative Party lost confidence in her leadership, driven in part by her disastrous economic policies.

Rishi Sunak, who succeeded Truss as prime minister last month, and Chancellor of the Exchequer Jeremy Hunt have hinted that additional tax increases and cuts in services could be needed to fill a £50 billion (US$56 billion) hole. Hunt is expected to reveal his new budget in an autumn statement on November 17.

“I think everyone knows we do face a challenging economic outlook and difficult decisions will need to be made,” Sunak, who formerly served as chancellor, said during prime minister’s questions in the House of Commons on Wednesday.

US Fed unleashes another big rate hike but hints at a pullback

The International Monetary Fund has forecast economic growth in Britain to slow to 1 per cent this year and 0.2 per cent next year, making it the worst performing advanced economy globally.

The interest-rate increase by the BOE comes as central banks around the world are tightening rates against the backdrop of a sharp-than-expected economic slowdown globally, with many countries experiencing high inflation levels not seen in decades.

On Wednesday, the Fed raised its borrowing rate by 0.75 percentage points to a target range of 3.75 per cent to 4 per cent – its sixth consecutive rate increase this year and its fourth consecutive by 75 basis points.

HSBC raises commercial lending rate to the highest level in 14 years

Fed Chairman Jerome Powell signalled the central bank would slow the pace of future rate increases, but the ultimate level of its borrowing rate is likely to be higher than expected.

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus,” Powell said.

Hong Kong’s five biggest lenders said they would raise their key interest rates to the highest level in 14 years after the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, raised its base rate to 4.25 per cent from 3.5 per cent in lockstep with the Fed.

Additional reporting by Agence France-Presse

Post