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Bank of England raises interest rates to 2.25%

by SuperiorInvest

As Britain goes through a period of huge change, with a new government and a new monarch, the central bank continues its efforts to stop high inflation settling into the economy by raising rates steadily and predictably.

The Bank of England raised its key interest rate by another half a percentage point to 2.25 percent on Thursday, taking the rate to its highest level since late 2008, but disappointing some who thought it would move by three-quarters of a percent. point. Consumer prices in Britain rose 9.9 percent from a year earlier in August, slowing slightly from the previous month but still close to the fastest rate of inflation in four decades as energy and food prices rose higher.

Politicians also voted to start selling the bank’s UK government bond shares back to the market, entering uncharted territory after more than a decade of expanding its balance sheet to provide easy money to creditors.

The new government is freezing energy bills and planning tax cuts to ease the pain of higher living costs. The pound has fallen to its weakest level since 1985 as investors question the country’s economic outlook and a recession looks inevitable despite a tight labor market. The bank predicts that the economy will contract slightly in the third quarter, following a decline in the second quarter that is widely considered a recession.

The state of flux in which the UK economy finds itself was evident in a rare three-way split between the Bank of England’s nine-member rate-setting committee. Five politicians voted to raise rates by half a point, the same big move as in the previous session; three wanted an even more aggressive increase of three-quarters of a point; and one person argued that economic activity is already weakening and future inflationary risks are fading, and he voted for just a quarter-point increase.

Since the bank’s last meeting in August, there have been major changes in government policy that have altered the inflation outlook. A new government led by Prime Minister Liz Truss took office this month. Amid fears of the devastating impact of rising energy costs on households and businesses, the government has moved to cap bills for both. The immediate effect is that inflation is expected to peak earlier and be much lower.

The bank said it expected the annual rate of inflation to peak just below 11 percent next month. Freezing household energy bills reduced peak inflation by about five percentage points. Still, the bank predicts inflation will be above 10 percent for the next few months before easing.

The bank meeting was delayed by a week due to the period of mourning for Queen Elizabeth II.

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