Bank of England Raises Interest Rates to 2.25%

Facts

• On Thursday, the Bank of England (BoE) raised its key interest rate by 50 basis points to 2.25% — the highest since 2008.
• This comes as the BoE forecast that the economy will shrink by 0.1% in the third quarter, which would be the second quarter in a row that the economy has contracted, meeting an informal definition of a recession.
• The purpose of the rate hike is to reduce inflation – the cost of basic goods including food, fuel, and electricity — from the current rate of 9.9% to the government target of 2%, the BoE said.
• The theory behind increasing the Bank Rate is that it will make borrowing more expensive, thereby reduce spending, and ultimately, it's hoped, lead to the cost of goods falling.
• In another move to tighten monetary policy, the BoE also voted unanimously to trim its £838B of government bond holdings by £80B over the next 12 months.
• A research briefing published by the House of Commons in September has linked the cost of living increase to strong consumer demand, supply chain bottlenecks, and increases in household energy and petrol prices.

Sources: MSN, Finance, Bank of England, ITV, Reuters, and Archive.

Narratives

• Establishment-critical narrative, as provided by Schroders. Despite facing an inflation crisis that outpaces other major economic players, the BoE — which decided to raise rates only by 50 basis points rather than 75 — is lagging far behind and taking an overly cautious approach in its monetary tightening. This will only result in higher inflation for longer and an underperforming sterling.
• Pro-establishment narrative, as provided by Financial Times. Amid the looming threat of a recession, the BoE's modest approach is the right one. The bank is in the tricky position of having to balance the need to control inflation against a desire to protect an increasingly fragile economy. Following a policy of gradual increase walks down the middle; the BoE can reassess at its next meeting.