Biggest interest rate hike in 30 years

LONDON >> The Bank of England rolled out its biggest interest rate increase in three decades Thursday, saying the move was needed to beat back stubbornly high inflation that is eroding living standards and is likely to trigger a prolonged recession.

The central bank boosted its key rate by three- quarters of a percentage point, to 3%, as Russia’s invasion of Ukraine has driven up food and energy costs, pushing consumer price inflation to 40-year highs. The aggressive step was expected after a more cautious half-point increase six weeks ago and matches the recent moves by the U.S. Federal Reserve and the European Central Bank.

Although higher interest rates will boost the cost of mortgages and credit card debt for already- stretched consumers, the move was necessary to control inflation that has left people with less money to spend and is slowing economic activity, Bank of England Gov. Andrew Bailey said.

“If we do not act forcefully now, it will be worse later on,” Bailey told reporters, hinting he wouldd be prepared for more increases ahead.

The bank, whose task got tougher after former Prime Minister Liz Truss’ economic plans roiled financial markets, forecast that the British economy is likely to contract through June 2024. That would be the longest recession since at least 1955, according to the Office for National Statistics.

The rate increase is the Bank of England’s eighth in a row and the biggest since a short-lived 1992 hike.

It comes a day after the U. S. Federal Reserve announced a fourth consecutive three- quarter-point jump.

Central banks worldwide have struggled to contain inflation after initially believing price increases were fueled by international factors beyond their control. Their response has intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.

Thursday’s rate decision was the first since Truss’ government announced $52 billion of unfunded tax cuts, which sent the pound plunging to record lows against the U. S. dollar, pushed up mortgage costs and forced Truss from office after just six weeks.

While most of Truss’ program has been canceled, the fallout remains: Borrowing costs are higher for the government, companies and homeowners because of concerns about economic and political stability in Britain, the bank said.

Truss’ successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills. Sunak and Treasury chief Jeremy Hunt plan to reveal their economic plan Nov. 17.

“The most important thing the British government can do right now is to restore stability, sort out our public finances and get debt falling so that interest rate rises are kept as low as possible,” Hunt said.

The Bank of England expects inflation to peak at around 11% in the last three months of the year, up from 10.1% in September.

Inflation should begin to slow next year, dropping below the 2% target within two years, the bank said.

The squeeze on people’s incomes likely contributed to a 0.5% decline in gross domestic product in the three months through September, which may be followed by a 0.3% drop in the fourth quarter, according to the bank’s forecast.

The projections are based on financial market data suggesting the key interest rate will rise to 5.25% by the third quarter of next year. The bank’s survey of financial professionals forecasts a lower peak of 4.5%, which would shorten the recession.

Bailey said there is uncertainty about how far and how fast the bank will boost interest rates because of volatility in natural gas prices and the country’s tight labor market.

The war in Ukraine boosted food and energy prices worldwide as shipments of natural gas, grain and cooking oil were disrupted.

That added to inf lation that began to accelerate when the global economy began to recover from the pandemic.

Europe has been hit particularly hard by a jump in naturalgas prices as Russia responded to Western sanctions and support for Ukraine by curtailing shipments of the fuel used to heat homes, generate electricity and power industry and European nations competed for alternative supplies on global markets.