The recent political unrest in Britain has served as a warning here. Last month, the Bank of England raised interest rates by three-quarters of a point as policymakers expected former Prime Minister Liz Truss’ budget plans, which included a plan to freeze household energy bills for two years, to increase inflationary pressures. After the end of her tumultuous tenure as prime minister, Prime Minister Rishi Sunak and his government rescinded almost all of their policies and announced a £55 billion ($68 billion) plan for higher taxes and spending cuts. The overall impact of these measures on inflation is likely to be small, the Bank of England said on Thursday.
These central banks plan to embark on a higher interest rate path even as economic growth deteriorates across the region and much of the impact of past rate hikes has yet to be felt.
In the UK, two policymakers, Silvana Tenreyro and Swati Dhingra, voted to keep interest rates stable, arguing that higher interest rates would already tighten financial conditions, citing weakness in the economy as incomes lagged far behind inflation . It was the first time since March that committee members had voted to put interest rates on hold.
The bank forecasts that the economy is already in a recession that will “last.” Households are grappling with the highest food price inflation in more than four decades, coupled with a rise in mortgage costs and higher energy bills. With wages lagging far behind inflation, workers in many sectors are holding strikes. Railroad workers, postal workers and nurses, among others, went on strike this week.
The ECB said the euro zone economy could contract this quarter and next due to higher energy costs, economic uncertainty and the impact of tighter financial conditions. Bank officials lowered their forecasts for the euro-zone economy next year, forecasting growth of 0.5 percent from an earlier forecast of 0.9 percent.
Although the European Central Bank previously stressed that it had already hiked interest rates by a historic amount, those concerns were brushed aside this month as the bank’s projections showed inflation would still exceed the target in 2025.
“Keeping interest rates at restrictive levels will reduce inflation over time by dampening demand and also protect against the risk of a sustained upward move in inflation expectations,” the ECB said on Thursday.