The rise, to 2.25%, the UK’s highest level since 2008, came as central banks around the world tightened policy in the wake of the Federal Reserve’s third consecutive rate hike of 0.75 percentage points. USA. Switzerland and South Africa raised interest rates by 0.75 percentage points, while Norway rose by 0.5 percentage points and Japan stepped in to strengthen the yen for the first time in 24 years. The BoE’s move was less than markets had expected and sterling later pared its gains for the day against the US dollar to around $1.13. still trading near its lowest level since 1985 against the US currency. Central banks around the world are rapidly raising interest rates as they try to combat the worst period of inflation in decades, with the Fed leading the charge. However, a majority of the BoE’s Monetary Policy Committee resisted pressure to match the pace set by the Fed, reflecting concerns about the state of the UK economy. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the decision provided “reassurance that the focus is on the outlook for consumer price inflation and evidence of emerging easing in the economy, rather than arbitrary keeping up with the Joneses”. The BoE said it now expects UK Gross Domestic Product to fall by 0.1% in the third quarter of the year, compared with an August forecast of 0.4% growth. That would mark a second straight quarter of decline, fueling fears that the economy is slipping into recession. It also suggested it would wait until November, when it updates its forecasts, to get a firmer view on the new UK government’s fiscal policy, which will be presented in a mini-budget on Friday. Even as the central bank seeks to rein in inflation, Kwasi Kwarteng, the new chancellor, is set to try to jump-start the economy with debt-financed tax cuts and an emergency plan to rein in energy bills. The MPC said that, “should the outlook point to more persistent inflationary pressures, including due to stronger demand, the committee will respond strongly as necessary.” Economists said this left the path open for the BoE to offset the impact of the tax cuts with a big rate hike at the November meeting. “In short, the Bank has said it will raise interest rates further to offset some of the boost to demand from the government’s fiscal plans,” said Paul Dales, chief UK economist at Capital Economics. The MPC said the government’s energy price guarantee would dampen inflation in the short term, with CPI now likely to peak just below 11 percent in October, earlier than expected – contrary to earlier private sector forecasts for levels about 15 percent of the time. But he said inflation would hover around 10 percent for several months, not necessarily low enough to dampen expectations of big price increases. “Many of our members believe that the top [in inflation] coming next year so it can be priced accordingly, running the risk of inflationary expectations becoming self-fulfilling,” said Kitty Ussher, chief economist at the Institute of Directors. In its deliberations on Thursday, the committee split three ways, with a majority – including BoE governor Andrew Bailey and chief economist Huw Pill – voting in favor of the 0.5 percentage point move. Three members – Jonathan Haskel, Catherine Mann and deputy governor Dave Ramsden – backed a bigger increase of 0.75 percentage points, arguing that faster action now could help the BoE avoid “a more extended and costly cycle tightening later.” Swati Dhingra, a new member of the committee, favored a more modest move of 0.25 percentage points on the grounds that economic activity had already weakened. The BoE also confirmed it would continue plans outlined in August to reduce the stockpile of assets it had built up under previous quantitative easing programs. It is targeting bullion sales of £80bn over the next 12 months, which will reduce total assets on its balance sheet to £758bn.
