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Bank of England Raises Interest Rates to Combat Inflation Surge

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Bank of England Raises Interest Rates to Highest Level in 15 Years

On August 3, the Bank of England announced a 25 basis point interest rate hike, raising the benchmark interest rate from 5% to 5.25%, marking the highest level in 15 years. This move comes as the 14th consecutive rate hike since December 2021, as the Bank of England aims to combat persistent inflation.

The decision to keep interest rates high is an effort to bring down stubborn inflation. Despite lowering its economic growth forecast, the Bank of England stated that the UK will avoid a recession.

The UK’s consumer price index (CPI) saw a surprise decline in June, rising 7.9% year-on-year, compared to 8.7% in May. Although lower than economists’ consensus forecast of 8.2%, it is still nearly four times higher than the Bank of England’s 2% target. The Bank of England believes that the drop in CPI in June was unexpected, but the smaller decrease in core inflation will ensure that interest rates remain constrained for a sufficient period to bring inflation back to the 2% target sustainably.

Bank of England Governor, Andrew Bailey, expressed relief that inflation is coming down. Bailey mentioned that inflation disproportionately affects the least well-off, and it is crucial to ensure that inflation returns to the 2% target. This is the primary reason for raising rates to 5.25%.

However, the Bank of England acknowledges that slowing inflation may take longer than anticipated. Developed countries worldwide have raised interest rates to curb inflation, with mixed results. While the Federal Reserve and the European Central Bank have experienced some success, the UK’s inflation remains persistent due to strong consumer demand and supply chain bottlenecks.

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Rising energy prices have hit UK households and businesses the hardest, surpassing any other European country. Energy consumption prices in the UK have increased by 79% since March 2019. Additionally, the UK faces labor market challenges, with approximately 400,000 people still unemployed compared to December 2019.

The Bank of England raised its economic growth forecast for this year but lowered it for the next two years. Despite the economic slowdown, the UK is expected to avoid a recession, given its economic resilience and ongoing inflationary pressures.

British Prime Minister, Rishi Sunak, acknowledged that inflation is not falling as quickly as desired but remains optimistic about the future. The Bank of England predicts that the pace of price increases will slow to around 4.9% by the end of the year, with inflation reaching its 2% target between April and June 2025.

Traders are currently estimating a 68% chance of a 25 basis point hike at the September meeting and a 32% chance of keeping rates unchanged. Market rates suggest that the Bank of England will continue to tighten rates further, with expectations of reaching 5.8% in the fourth quarter of 2023.

Kim Crawford, global rates portfolio manager at JPMorgan, believes that this rate hike will not be the last as inflation remains high.

Disclaimer: The Securities Times provides this information as reference only and does not constitute substantive investment advice. Individuals should operate at their own risk.

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