The Bank of England has raised interest rates by three quarters of a percentage point, making it the biggest hike since 33 years (1989).
The move was taken by the bank on Thursday, as it tries to contain skyrocketing inflation, as the UK economy moves toward recession, which the bank warns could the country’s longest ever.
This is the eight interest rate hike in less than a year, taking the benchmark rate to 3 percent.
The massive hike is line with the interest rate hikes made by the US Federal Reserve on Wednesday and the European Central Bank last week. The UAE, Saudi Arabia and Bahrain also raised its interest rates following the US Federal Reserve hike.
The UK’s financial markets are undergoing a series of unprecedented events, especially as the sovereign witnessed a change in prime minister, just 44 days after she took over office.
Former Prime Minister Liz Truss’ introduction of the mini budget, which promised $51.6 billion of unfunded tax cuts, catalysed a series of unfortunate events.
This included the crashing of the pound, collapsed bond prices, mayhem in mortgage markets and an emergency intervention by the Bank of England to help save pension funds from insolvency.
While Truss’ tax-cutting plans have been scrapped, inflation continues to creep up through high food and energy costs.
Meanwhile, the annual rate of inflation hiked up to 10.1 percent in September, from 9.9 percent the previous month, returning to the 40-year high hit of July.
As of now, policymakers of the Central Bank are now waiting on the UK government’s budget announcement on November 17.
The announcement is expected to detail out spending plans and tax policies, all of which could influence inflation next year.
Earlier this week it was announced that the Bank of England plans to shrink its balance sheet, selling GBP750 million ($859 million) of short-term government debt on Tuesday, despite bond market turbulence.
According to a report by the New York Times, the bank’s latest projections “described a very challenging outlook for the UK economy,” policymakers said, according to the minutes of their meeting this week. “It was expected to be in recession for a prolonged period” and the inflation rate would be above 10 percent in the near term, they added.
In a sign of renewed confidence in the United Kingdom, investors placed about GBP2.45 billion ($2.8 billion) worth of bids for the bonds, Reuters reported.
Bank officials revealed that they are determined to bring inflation down to its 2 percent target, by using higher interest rates.
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