In the wake of the Fed, the Swedish, Norwegian, Swiss and British central banks are tightening the screws.
In the great global poker game launched by central banks to raise their interest rates, the Bank of England would appear almost like a small player. While the markets were expecting an increase of 0.75 points, like the Fed the day before, the ECB on September 8 or even the Swiss National Bank on the same day, it finally opted for an increase of 0.50 points on Thursday. which might seem moderate in comparison. Of 90 central banks to have raised their rates this year on the planet, half opted for increases of 0.75 point or more. The Swedish Riksbank has squarely put on the carpet a one-point increase in its key rate (which has reached 2.5%), a more usual movement in emerging countries.
The Bank of England's monetary policy council adopted the decision by five votes out of nine members, while three wanted a three-quarter point hike. This caution is justified by lowered expectations for inflation, which would reach "only" 11% in October, according to its forecasts, against 13% previously anticipated. The big moneymakers believe that the energy shield aimed at limiting household bills to 2,500 pounds (2,860 euros) per year, announced two weeks ago by Prime Minister Liz Truss, will make it possible to compress inflation. His government must also present this Friday a program of tax cuts, intended to revive the economy.
But don't be mistaken. The Bank of England continues to apply one of the most restrictive monetary policies in the world. It has already raised its rates seven times since last December, reaching 2.25% (compared to 0.75% of the ECB deposit rate). It undertook to continue this increase at each of its meetings until the end of the year. So much so that economists are betting on a key rate of 3.75% in mid-2023, while the financial markets are anticipating a rate of 5%! Expectations reflected in the yield on ten-year British government bonds, which reached 3.45% on Thursday, up 0.15 points. The mission is far from accomplished, since the Bank of England expects inflation above 10% for several months. And, if government support for households could mitigate it, tax gifts could, on the contrary, blow on the embers of rising prices. This clash between monetary and budgetary policies could renew the ire of the executive against the Bank of England, in the crosshairs of Prime Minister Liz Truss.
Sale of assets
The Bank of England has recorded the probable entry of the United Kingdom into recession. After a slight decline in GDP in the second quarter, it expects a further decline of 0.1% in the third quarter, in particular due to the cessation of activity for the mourning of Elizabeth II. The central bank had previously forecast an entry into recession in the fourth quarter, for more than a year. Medium-term doubts about the British economy are contributing to a plunge in its currency. The pound remains at its lowest level since 1985 against the dollar.
To counter this tumble, British central bankers must not be outdone by their counterparts across the Atlantic. The bar is high. The Federal Reserve raised rates by three-quarters of a point on Wednesday for the third straight time, to a range between 3% and 3.25%. Further cumulative increases of 1.50 points are expected in the coming months.
London has also announced a new phase of its monetary tightening, with the start of the sale of assets held by the Bank of England to reduce its heavy balance sheet of 838 billion pounds (958 billion euros) from october.