BoE Announces Biggest Rate Hike Since 1989

BoE Announces Biggest Rate Hike Since 1989
Paul Allison, CFA

over 1 year ago2 mins

The Bank of England (BoE) raised interest rates by a jumbo 0.75 percentage points on Thursday – its most aggressive rate hike since 1989 – as the central bank steps up its efforts to cool the UK’s red-hot inflation.

It was the eighth-straight hike for the BoE, and comes at a time when the central bank has already described the economy as in a recession. The decision underscores the challenges faced by many of the world’s central banks, as they struggle to rein in damaging levels of inflation, while hoping to avoid plunging their economies into a deep and prolonged recession.

But all eyes were on the words buried in the press release that accompanied the decision. In it, the Bank’s forecasters say they see inflation falling to well below the BoE’s 2% target in a year’s time. And this could be a sign that the central bank might be prepared to take its foot off the rate-hiking pedal in the months to come.

That suggests there may be some light at the end of the tunnel for the UK’s borrowers. And the news will be welcomed by one particularly indebted nail-biter: the UK government. See, its debt mountain has drifted to around 100% of its gross domestic product, or GDP (generally, the broadest measure of the total goods and services produced by an economy in a given year), which itself is about three times the country’s income from tax receipts. That’s not so bad if you’re thinking of that debt like a mortgage, say, lent at four or five times a household’s pre-tax salary. But here’s the thing: higher interest rates only pile more pressure on a high debt load, and the UK doesn’t have a giant country-sized house it can sell to repay what it owes if it runs into trouble. So that 100% – it’s high. Of course, the UK’s overall income is a lot safer than any one household’s, but the fact that its obligations are not backed by an asset like a house or a car, means that its creditworthiness is a matter of trust.

So don’t expect any near-term change in the belt-tightening tone you’ve been hearing from the UK’s finance chiefs. But if the Bank’s projections for inflation are right, then borrowers up and down the country – including the government – might eventually be looking at better news to come.

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