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Bank of England hikes rates but avoids more aggressive measures

Pedestrians walks past Bank of England in the City of London on Thursday. Agence France-Presse

Britain’s central bank raised its key interest rate by another half-percentage point on Thursday, avoiding more aggressive steps to tame inflation that the US Federal Reserve and other banks have taken.

It is the Bank of England’s seventh straight move to increase borrowing costs as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation. Despite facing a slumping currency, tight labour market and inflation near its highest in four decades, officials decided against acting more boldly as large hikes threaten to tip the economy into recession.

The bank matched its half-point increase last month – the biggest in 27 years – to bring its benchmark rate to the highest level in 14 years at 2.25%. The decision was delayed for a week as the United Kingdom mourned Queen Elizabeth II and comes after new Prime Minister Liz Truss’ government announced a cap on spiraling energy bills for households and businesses.

The energy relief package means consumer prices will peak at 11% in October, lower than the previously expected, the bank’s monetary policy committee said.

“Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back,” the bank said.

The UK decision comes during a busy week for central bank action marked by much more aggressive moves to bring down soaring consumer prices. The US Federal Reserve hiked rates on Wednesday by three-quarters of a point for the third consecutive time and forecast that more large increases were ahead.

Also Thursday, the Swiss central bank enacted its biggest-ever hike to its key interest rate.

Surging inflation is a worry for central banks because it eats away at consumers’ purchasing power. The traditional tool to combat inflation is raising interest rates, which reduces demand and therefore prices, by making it more expensive to borrow money.

Inflation in the United Kingdom is running at 9.9%, close to it’s highest level since 1982 and five times higher than the Bank of England’s 2% target. The British pound is at its weakest against the dollar in 37 years, contributing to imported inflation.

Since then, Truss’ government has unveiled a massive relief programme for energy bills that have soared as Russia’s war in Ukraine has helped drive up the price of natural gas needed for heating. Economists say the measures mean inflation will peak at a lower level and then fall faster next year.

The Bank of England avoided pressure to go bigger even as other banks around the world take aggressive action against inflation fueled by the global economy’s recovery from the COVID-19 pandemic and then the war in Ukraine.

Global markets plunge: Global stock markets sank on Thursday after the US Federal Reserve delivered another big interest rate hike to cool galloping inflation and raised its outlook for more increases.

London and Frankfurt declined after Switzerland’s central bank also raised its benchmark lending rate by its biggest margin to date. The Philippines’ central bank also announced a rate hike.

Shanghai, Tokyo and Hong Kong declined. The yen fell to a 24-year low against the dollar after Japan’s central bank left its key lending rate unchanged, then moved higher following an intervention by the bank in the foreign exchange market.

Wall Street’s benchmark S&P 500 index fell 1.7% to a two-month low after the Fed raised its key lending rate Wednesday by 0.75 percentage points to a 14-year high. The Fed indicated it expects that rate to be a full percentage point higher by year’s end than it did three months ago.

In early trading, the FTSE 100 in London lost 0.5% to 7,204.57 and Frankfurt’s DAX sank 0.5% to 12,705.94. The CAC 40 in Paris fell 0.7% to 5,989.63.

On Wall Street, the S&P 500 future was up 0.1% and that for the Dow Jones Industrial Average gained 0.3%.

On Wednesday, the Dow fell 1.7% and the Nasdaq composite lost 1.8%.

In Asia, the Shanghai Composite Index sank 0.3% to 3,108.90 and the Nikkei 225 in Tokyo slid 0.6% to 27,153.83. Hong Kong’s Hang Seng tumbled 1.7% to 18,134.63.

South Korea’s Kospi sank 0.6% to2,332.31 and India’s Sensex opened down 0.2% at 59,304.34.

New Zealand, Bangkok and Jakarta rose while Singapore declined.

The yen fell to 146 to the dollar after the Bank of Japan left its benchmark lending rate at minus 0.1% and its ultra-loose monetary policy unchanged. That underscored its divergence with the strategy of the Fed and other central banks of interest rate hikes, which has led investors to buy the dollar.

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