On August 3rd, the Bank of England (BoE) announced a 0.25 percentage point increase in interest rates to 5.25%, marking the 14th consecutive rate hike as a measure to tackle persistently high inflation.
The announcement by BoE aligns with economists’ expectations. Prior to this, households and businesses in the UK had been concerned about the possibility of a 0.5 percentage point rate hike, similar to the increase implemented in June.
However, economic data from July showed that inflation in the UK decreased faster than anticipated, reaching 7.9%. This has alleviated some pressure on the central bank in its decision to raise interest rates to curb inflation.
Given that inflation remains about four times higher than the target rate of 2%, BoE is likely to continue raising interest rates in the coming months.
Economic experts predict that BoE’s interest rate decisions will largely depend on the pace of inflation decline. Higher interest rates can help contain inflation, but it comes at the cost of hindering economic growth, as businesses and consumers face higher interest payments for loans, such as mortgages, auto loans, or production equipment financing.
Last week, both the Federal Reserve (Fed) and the European Central Bank (ECB) also raised interest rates. However, it is likely that these two central banks will halt rate hikes sooner than the Bank of England, as inflation in the mentioned markets has decreased significantly (the US down to 3%, and the eurozone down to 5.3%).
Raising interest rates is a measure employed by many central banks worldwide to combat inflation amid surging energy prices and global supply chain disruptions during the post-COVID-19 period.
Economists anticipate that inflation in the UK will remain high for a more extended period due to various factors, such as Brexit’s impact on bilateral trade and increased costs for businesses.
In addition, some opinions suggest that BoE acted more slowly than other central banks in making the decision to raise interest rates.
Following BoE’s interest rate hike announcement, the British Pound (GBP) reacted with a slight recovery. At the time of writing, GBP rebounded to $1.273 USD.