For the first time since 2019, the Federal Reserve has raised US interest rates. Now the Bank of England is facing scrutiny — will it raise UK borrowing costs a third time in a row?
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The Federal Reserve raising the rates doesn’t come as a surprise, after the Russian invasion of Ukraine, it was pretty much a foregone conclusion they would do so. But the US is not as dependent on imported energy as other parts of the world and it’s quite distant from the conflict, at least geographically speaking. According to the Fed’s chairman, Jerome Powell, this is only just the beginning as there are even more rate rises planned before the end of the year.
Things are not so certain on this side of the pond, though. Experts believe there are three options available: another quarter-point increase; a half-point increase; or no change. The decision is up to the nine members of the Monetary Policy Committee and it’s possible they could all be split on the best approach.
It’s not an easy call to make which option to go with because inflation was already sky-high before the invasion pushed global commodity prices higher than they already were. And on the other hand, UK households are facing reduced real income because of inflation, and price increases for energy, food, and increased taxes show no sign of slowing down.
Many are worried about a return to a stagflation economic phase à la the 1970s and fear of heightened unemployment and inflation rates staying high are only adding to the concern.
While much can’t be done by the Bank of England about energy and food prices, it can impact inflation and most directly, interest rates in the country. Before the invasion, the BoE was expected to raise the base rate, and while that won’t be ruled out, any changes they do make are likely to be less aggressive than previously thought.