(London) The Bank of England (BoE) announced on Thursday it will raise its key rate for the fifth time in a row, to fight inflation that it says should exceed 11% this fall, but the warning from its message has alarmed markets and some economists.
Posted at 9:01 am
Updated at 11:26 am
The Bank of England did not decide to raise interest rates by more than 0.25 points, unlike the US Federal Reserve, but it “will pay special attention to indicators of persistent inflationary pressures, and will respond aggressively if necessary,” she promised – in the minutes of her meeting.
Expectations for growth and inflation were not reviewed in detail at this meeting, but while inflation rose in April to 9%, its highest level in 40 years, the Bank of England now expects a peak at “more than 11%” within one year in October, when the ceiling is adjusted Regulator for electricity prices to the top.
Like the US or the Eurozone, prices are rising in the UK due to disruptions to production chains caused by the COVID-19 pandemic and higher energy prices since the beginning of the Russian invasion of Ukraine.
But the country, which began raising rates at the end of 2021, is also facing a slowdown in growth, with a second straight monthly contraction in economic activity in April.
The Bank of England now expects a 0.3% drop in GDP in the second quarter, still forecasting a 0.1% increase in May, a drop that comes on top of the already expected contraction for the last three months of the economy.
The slow growth thus prevents the Bank of England from being more resolute in the face of higher rates, unlike the US Federal Reserve which on Wednesday raised its key rate by three-quarters of a point, its first since 1994.
The European Central Bank (ECB) held an extraordinary meeting on the same day to try to reassure the European debt market while maintaining the interest rate hike scheduled for July.
Core inflation, which excludes energy and food prices, is “higher in the UK than in the eurozone or the US,” the Bank of England admits.
“Helpment difficulties remain high and so is the demand for workers,” she adds, describing the labor market as “remaining tight”, even if the UK unemployment rate has risen slightly over the past three months. At the end of April increased by 3.8%.
The UK is absorbing the consequences of Brexit, which has disrupted access for European workers, while the post-pandemic recovery leads to strong demand and a wage war.
However, three of the nine members of the Monetary Policy Committee (MPC) voted in favor of a 0.5 point rate hike, as in May, to prevent the “recent trend of wage increases, rate-raising decisions by businesses and inflation expectations” being taken hold.
These members may find that it is “better to make a sharp but short correction of the economy in the short term to eliminate hyperinflation than to realize later that it must be corrected slowly and painfully,” explains Callum Pickering, an analyst at Berenberg.
“We think the Bank of England is giving too much importance to the slowdown in the economy and not enough for inflation,” worries Paul Dills, an analyst at Capital Economics, who stresses that the Bank “is not promising anything,” unlike the Fed, which is more specific about the rate hike plan. his own.
On the contrary, some analysts welcome the moderate tone of the BoE. Pantheon Macro analyst Samuel Tombs agrees that “the MPC’s decision proves that while other central banks are losing their minds, the committee is maintaining a piecemeal approach.”
A sign of the inconsistency of observers, the London Stock Exchange fell on Thursday, the British pound temporarily fell more than 1% against the dollar before rallying, and the dollar suffers from disappointing US economic indicators. A barometer of the bleak outlook for analysts and forex traders for the British economy, it has melted 9% since the start of the year.