UK central bank hikes rates like Fed amid financial turmoil | Politics

“A banking curve ball has been thrown into the Bank of England’s already tricky juggling act, but for now the eye of policymakers is still firmly trained on catching inflation and bringing it under control,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown, which manages more than 120 billion pounds ($147 billion) for investors.

Still, Thursday’s move was the smallest rate hike since May 2022, with the Bank of England forecasting a drop in inflation to 2.9% by the end of the year as energy costs fall and the big price increases recorded last year drop out of calculations.

As it did last month, the central bank indicated that it no longer has a presumption for further rate increases, saying only that it would closely monitor price pressures in the economy.

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the bank said.

Raising interest rates increases the cost of borrowing, which reduces spending and relieves upward pressure on prices. But it also tends to slow economic growth.

Central bankers worldwide are struggling to balance competing economic demands as they try to rein in inflation, which erodes savings and increases costs for consumers and businesses, without unnecessarily damaging economies weakened by the COVID-19 pandemic and Russia’s war in Ukraine.

The Bank of England said Thursday that it had determined that British banks are “resilient.”

“The U.K. banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy in a wide range of economic scenarios, including in a period of higher interest rates,” the central bank said.

That echoed the words of Fed Chair Jerome Powell, who sought to reassure Americans that their bank deposits were safe as the Fed raised its key rate by a quarter-point Wednesday.

The Swiss central bank also went higher, hiking by half a point Thursday and declaring that the government-orchestrated takeover of Credit Suisse by Swiss rival UBS “put a halt to the crisis.”

The Bank of England was among the first to begin raising borrowing costs after a prolonged period of low interest rates following the 2008 global financial crisis. In 11 hikes since December 2021, the key rate went from just 0.1% to 4.25%.

As they assess the potential impact that higher rates are having on banks, policymakers also are weighing how long it will take recent increases to flow through to the broader economy.

If they wait too long to stop raising rates, they risk slamming the breaks on already anemic growth. If they stop too soon, they risk inflation becoming embedded in the economy.

Luke Bartholomew, senior economist at the U.K.-based fund manager abrdn, said he expects Thursday’s move to be the last rate increase of this cycle because the impact of past hikes and recent market volatility will begin to slow economic growth.

“However, there is still a significant risk of one final rate increase if inflation proves to be a bit stickier in coming months,” he said.

The Bank of England will have to make that decision in an even more complex environment than other central bankers.

U.K. inflation is stuck above 10%, while it dropped to 8.5% last month in the 20 countries sharing the euro and to 6% in the U.S.

Treasury chief Jeremy Hunt applauded the central bank’s decision.

“With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone,” he said.