US in bumper rate hike to crush inflation

Will Bank of England follow suit?

AMERICA’S central bank last night pushed ahead with another mammoth interest rate hike in its battle to crush inflation.

The Federal Reserve plumped for a second consecutive 0.75 percentage point rise – taking the benchmark rate into the 2.25pc to 2.5pc range.

That puts it back at pre-pandemic levels as inflation runs at a 41-year high of 9.1pc.

The hefty increase comes just a month after it last bumped up rates by 0.75 percentage points, the biggest rise since 1994.

Some traders were expecting an even larger hike.

But worries over the strength of the US economy appeared to be creeping in, and the Fed noted data on spending and production had ‘softened’.

Central banks usually raise rates when inflation gets out of control. In theory, this should help keep a lid on prices by encouraging saving rather than spending. But officials fear that overly aggressive rate increases could slam the brakes on the Covid recovery.

Richard Flynn, UK managing director at investment firm Charles Schwab, said: ‘ As the tug-of-war between inflation and recession fears plays out in the second half of the year, we expect to see highly volatile markets.’

Since pandemic lockdowns ended, workers have been in high demand, leading to historically low levels of joblessness.

But economists have warned that this could now begin to reverse as businesses which have been battered by higher prices and the rising cost of borrowing look to make cuts.

Marcus Brookes, chief investment officer at Quilter Investors, said: ‘It will stoke fears that we are nearing a recession in the United States.

‘The labour market remains incredibly tight and as such we should not be surprised if we start to see some weakening in that data.’

He added that the Fed’s chair, Jerome Powell ( pictured), was facing a ‘tough balancing act’.

Inflation has soared around the world as demand for goods, services and staff outstripped supply in the wake of the pandemic. Food and energy prices have also rocketed since the Russian invasion of Ukraine.

Inflation is at a 40-year high of 9.4pc in the UK and a record 8.6pc in the eurozone.

Central banks around the world have been desperately raising interest rates in an attempt to bring inflation back under control.

The Bank of England has raised rates five times since December – taking them from 0.1pc to 1.25pc – and looks set to act again next week.

The European Central Bank raised raising rates this month by 0.5 percentage points from minus-0.5pc to zero, the first such rate hike in the eurozone for 11 years.

This month, Bank of England Governor Andrew Bailey said that it could raise rates by 0.5 percentage points at its next meeting next week – the biggest rate rise in the UK since 1995.