London Inflation in the UK is higher than in the US, but the Bank of England (BoE) is raising interest rates less than the US Federal Reserve. As expected, the British central bankers increased interest rates by 25 basis points to 1.25 percent for the fifth time in a row.
That didn’t go far enough for three members of the Monetary Policy Committee: They wanted to raise interest rates by half a percentage point in order to get the accelerating inflation under control. The Bank of England expects inflation to rise to more than 11 percent by October.
In April, inflation hit a 40-year high of nine percent. Great Britain is thus the country with the highest inflation and the lowest economic growth among the seven leading industrial nations. The British economy shrank slightly in April. The central bank expects economic output to have declined throughout the second quarter.
The government in London is trying to absorb the sharp increase in the cost of living and avoid a recession with direct financial aid to consumers. With a view to the government aid of the equivalent of 17.5 billion euros, however, the country is in a dilemma: According to calculations by the central bank, gross domestic product could be 0.3 percent higher in the next twelve months, but inflation should also be an additional one Get a boost of 0.1 percent.
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In a bid to break the price trend, the BoE announced further rate hikes. The BoE fears that inflationary pressures are no longer solely due to high energy and food prices, but that tightening in the UK labor market is also driving prices higher.
The pound is losing ground
On the financial markets, the pound sterling continued to lose ground against the US dollar. The reason for this is the increasing interest rate differential between the two countries. The Fed also surprised many traders in the City of London with its historic rate hike of 75 basis points on Wednesday.
“More rate hikes are likely, but we remain of the view that the BoE will find it difficult to deliver the tightening markets are pricing in without jeopardizing the UK’s economic recovery,” commented Henry Cook of Japan’s MUFG Bank in London .
More: Largest rate hike since 1994: US Federal Reserve raises interest rates by 0.75 percentage points