If the US hikes interest rates to 2.5% to curb inflation, will the Bank of England follow suit?
- The Federal Reserve rose 0.75 percentage points for the second consecutive month, bringing interest rates into the 2.25 to 2.5 percent range
- That brings it back to pre-pandemic levels, as inflation sits at 9.1 percent
- The Bank of England has hiked rates five times since December – from 0.1% to 1.25% – and is expected to start trading again next week
The US Federal Reserve pushed ahead with another mammoth interest rate hike last night in its fight against inflation.
The Federal Reserve plunged for a second straight 0.75 percentage point rise, taking interest rates into the 2.25 percent to 2.5 percent range. That puts it back to pre-pandemic levels, as inflation hits a 41-year high of 9.1 percent.
The sharp rise comes just a month after it last pushed rates up 0.75 percentage point, the biggest rise since 1994. Some traders were expecting an even bigger hike.
Britain’s eyes now turn to what Bank of England rate setters do next, with chief Andrew Bailey signaling a potential 0.5% move at next week’s meeting after earlier votes for a hike by some policymakers was.
The Bank of England has hiked rates five times since December – from 0.1% to 1.25% – and is expected to start trading again next week
But worries about the strength of the US economy appeared to be creeping in, and the Fed noted that spending and manufacturing data had ” eased off”.
Central banks usually raise interest rates when inflation gets out of hand. In theory, this should help keep prices in check by encouraging saving rather than spending.
But officials fear overly aggressive rate hikes could slow the Covid recovery.
Richard Flynn, UK managing director of investment firm Charles Schwab, said: ‘As the tug-of-war between inflation and recession fears plays out in the second half of the year, we expect very volatile markets.’
Labor has been in high demand since the end of the pandemic lockdowns, leading to historically low unemployment rates. B
But economists have warned that this could now be reversed as companies, battered by higher prices and rising borrowing costs, seek to cut back.
Marcus Brookes, chief investment officer at Quilter Investors, said: “It will fuel fears that we are approaching a recession in the United States. The job market remains incredibly tight so we shouldn’t be surprised if we see some softening in this data.’
He added that Fed Chair Jerome Powell faces a “tough balancing act.” Inflation has skyrocketed around the world as demand for goods, services and personnel has outstripped supply amid the pandemic.
Food and energy prices have also skyrocketed since the Russian invasion of Ukraine. Inflation is at a 40-year high of 9.4 percent in the UK and a record 8.6 percent in the eurozone.
Central banks around the world have been frantically raising interest rates in a bid to bring inflation back under control. The Bank of England has hiked rates five times since December – from 0.1% to 1.25% – and is expected to start trading again next week.
The European Central Bank this month raised interest rates by 0.5 percentage points from minus 0.5 percent to zero, the first such hike in the euro zone in 11 years. This month Bank of England Governor Andrew Bailey said it could raise interest rates by 0.5 percentage point at its next meeting next week – the UK’s biggest rate hike since 1995.
