The Bank of England is poised to raise interest rates for the 14th consecutive time on Thursday, reaching a fresh 15-year high. The move comes as the central bank seeks to tackle persistently high inflation in the UK economy. Economists widely expect the Bank of England to raise its benchmark rate by a quarter of a percentage point, bringing it to 5.25 per cent.
Concerns had been circulating among households and businesses over the possibility of another half-point increase, similar to the move made in June. However, last month’s figures indicated a more substantial drop in inflation to 7.9 per cent. It has eased the pressure for such an aggressive approach this time.
“With inflation still four times the 2 per cent target, the Bank of England has little choice but to raise the bank rate again. Indeed, leave the door open to further hikes in upcoming meetings,” stated Kallum Pickering, senior economist at Berenberg Bank.
While the US Federal Reserve and the European Central Bank have also raised rates recently. They are expected to take a more cautious approach due to sharper declines in inflation. In the United States, price spikes have eased to 3 per cent. And across the 20 eurozone countries, inflation has receded to 5.3 per cent.
Brexit and Slow Rate Response: Factors Behind UK’s Elevated Inflation
Central banks worldwide have been raising borrowing costs to combat inflationary pressures resulting from higher energy prices and supply chain disruptions triggered by Russia’s invasion of Ukraine. These inflationary pressures have emerged as the global economy recovers from the impact of the COVID-19 pandemic.
Higher interest rates not only help contain inflation but can also impact economic growth. The increase in borrowing costs makes it more expensive for consumers and businesses to borrow funds for purchasing homes, cars, or equipment.
The UK’s higher inflation rate can be attributed to several factors. Some economists point to Britain’s departure from the European Union, commonly known as Brexit. That has impeded trade and raised costs for businesses. Additionally, others criticize the Bank of England for a slow response in raising interest rates. Allowing inflation to take root more broadly in the economy, particularly in the form of higher wages.