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Nova Scotia

Bank of England hikes rates by half-point to tame inflation

LONDON (AP) – The Bank of England hiked interest rates by half a percentage point on Thursday in a bid to tame double-digit inflation fueling a cost-of-living crisis, public sector strikes and recession fears.

LONDON (AP) – The Bank of England hiked interest rates by half a percentage point on Thursday in a bid to tame double-digit inflation fueling a cost-of-living crisis, public sector strikes and recession fears.

The bank’s Monetary Policy Committee voted 7-2 to raise interest rates to 4%, approving the 10th straight rate hike since a post-pandemic surge in the global economy and Russia’s war in Ukraine pushed inflation to 40-year highs .

Economists believe this could be the last major rate hike for the UK central bank after inflation slowed to 10.5% in December from a peak of 11.1% two months earlier. It forecast a drop to around 4% by the end of the year.

“We have already done a lot with the installments. The full impact of this is yet to be seen, but it is too early to announce victory,” Bank Governor Andrew Bailey said at a news conference. He added, “We’ve seen a turnaround, but it’s very early days and the risks are very big.”

The bank pointed to high global inflation but said “it has likely peaked in many advanced economies, including the UK”, noting falling energy prices and fewer supply chain disruptions.

The US Federal Reserve has begun to taper its response, raising interest rates by just a quarter point on Wednesday. The European Central Bank, meanwhile, is expected to make it big again on Thursday, with economists forecasting a half-point rise.

The Bank of England, noting that further hikes “would be required” if inflation proves to be persistent, said its recession forecast was less stringent than previously forecast. The overall size of the economy will shrink throughout 2023 and the first quarter of 2024 as high-energy prices and interest rates constrain spending, the bank said.

“This forecast is consistent with the technical definition of a recession consisting of at least two consecutive quarters of falling production,” the bank said. “But that’s a much flatter profile for the fall in production than expected in November.

Optimism mounted that rate hikes might be easing after UK inflation fell for the second straight month to 10.5% in December from a peak of 11.1% in October. That’s still much higher than in the US and the 20-country eurozone, where inflation slowed to 6.5% in December and 8.5% in January, respectively.

With food and service costs rising and wage increases beating forecasts, the bank sent the message that it is serious about fighting inflation, even as energy prices fall and concerns about sluggish economic growth take center stage.

“The extent to which domestic inflationary pressures ease will depend on how the economy evolves, including the impact of the significant hikes in key interest rates to date,” the bank said in a statement. “There is significant uncertainty about the prospects.”

After more than a decade of record-low interest rates, the Bank of England began raising the cost of borrowing in December 2021 when its policy rate was just 0.1%. The bank stepped up its fight against inflation over the past year, approving four large hikes of half a point or more since August to bring the interest rate to 3.5%.

Inflation skyrocketed after Russia’s invasion of Ukraine caused food and energy prices to rise sharply, leading to the biggest fall in British living standards since the 1950s. That has sparked a wave of strikes – including the biggest day of industrial action in more than a decade on Wednesday – as nurses, train drivers, border guards and teachers demand pay rises.

The government is trying to prevent higher wages from triggering a second round of domestically driven inflation that could be more difficult to contain.

Rising prices are also choking off economic growth and straining public finances as the government spends billions to help consumers and businesses hit by high energy bills this winter. However, wholesale natural gas prices in the UK are down 75% from their peak in late August, which will translate into lower costs for businesses and consumers in the coming months.

The International Monetary Fund said this week that the UK is on track to be the only major economy to shrink this year, even as prospects for the rest of the world improve. The IMF said the country’s gross domestic product is expected to contract by 0.6% in 2023, compared to a previous forecast of 0.3% growth.

Danica Kirka, The Associated Press

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